Why and how will the mortgage rate affect me? These are the questions asked by many, and this blog will cover the currently difficult topic. There is no good news about mortgage interest rate increases. Therefore, this blog helps to clear up some of the terms and state of the current mortgage rates in the UK.
So, what is a mortgage rate? A mortgage rate is the rate of interest charged on a mortgage. The lender, which is usually a bank or building society, determines what the mortgage rate is set to. There are two options, either fixed or variable. There are also terms of your mortgage where your agreed rates are fixed for a few years.
Length of the mortgage rate agreement
The length of the mortgage rate will depend on what rate the lender will give you and for how long. For some reason, you cannot get a mortgage rate for the same entirety of your mortgage repayment. Typically, a mortgage will take 25-35 years to pay off. Depending on the cost of the property, the interest rate and how much you can pay back each month.
Most lenders will typically offer 3-5 years on fixed-term mortgage repayment. They typically offer up to five years as the interest rate may be so low that the lender is not making any money.
The longer your rate, the chances that the amount you pay back will be higher, as it is a longer risk for the lender. So typically, people will choose a 3-year repayment. This does come with benefits. You do not have to stay with the same lender but shop around for the best deal, at which point they will take your mortgage over. You will then repeat the process again when your term ends.
Fixed mortgage rate
A fixed mortgage rate is when you agree to pay a fixed mortgage rate for the agreement term. This means you will pay the same monthly mortgage amount regardless of the current interest rates. This has both benefits and some disadvantages.
The benefits are that if the interest rates grow, then you will not be affected and will not be charged per month for your repayment. However, if the rate decreases after you agree to a fixed price, you could pay more than some at a variable rate.
Variable mortgage rate
A variable mortgage rate is when you repay a provider’s current interest rate. This is perfect for when there could be a decrease in interest as your monthly repayments will decrease. However, as mentioned above, if they increase, you could pay a lot more for your mortgage each month.
Which mortgage rate is best?
The answer to this question is a difficult one. It all depends on your circumstances and what is happening in the country and even the world when you take out your first mortgage or renew it. If the country is in a position where reduced interest rates are mentioned, it is a good time to take a variable mortgage rate. However, a fixed mortgage rate is advisable if there are uncertainties or financial uncertainties. Even though you may end up paying more for your mortgage repayments than you wanted, it could be the best option because the rates can quickly rise, as we have seen in recent times within the UK.
Why are we seeing the highest mortgage rates now?
There are many factors for why we are told interest rates are increasing. These stem from the pandemic, Brexit, the Russian war with Ukraine and inflation.
Inflation is being coined as the main reason for the increase because lenders deem it necessary to help curb inflation.
What is inflation?
The Bank of England explains inflation as follows.
“We know the rate of inflation because every month the Office for National Statistics checks the prices of a whole range of items in a ‘basket’ of goods and services.
They record the cost of over 700 things that people regularly buy. The basket includes everyday things like a loaf of bread and a bus ticket. It also includes much larger ones, like a car and a holiday.
The price of that basket tells us the overall price level. This is known as the Consumer Prices Index or CPI.” – Bank of England
The reason why the cost of goods has increased is because of the other factors mentioned above. Firstly, Brexit has not been all that some expected. The prices we as a country pay for products from neighbouring countries have grown. This means we are consumers and get that increase passed on to us. This is why food and electronics have become almost unaffordable for many in the UK. This then impacts inflation as these higher prices are considered to calculate the inflation rate.
The Ukraine war with Russia has also been to blame by parliament as it has driven up fuel and food costs. Ukraine produces 10% of the world’s wheat and 15% of the world’s grain, and with a war going on, they cannot continue to produce and export due to Russian control of many ports. With fuel and food in the inflation calculator again, it will push up the prices.
The pandemic was tragic in many ways. It caused many UK businesses to close, making people redundant and spending less money than they once did. This has an impact on our economy as a whole and will affect the strength of our economy. This affects inflation because it makes lenders worry about lending money in uncertain times, so they increase the interest they want, hence higher mortgage rates.
How much can my mortgage repayments go up by?
The current inflation rate is 8.7%, and the target from the government is 2%. We are far from that, but the government has a plan. Unfortunately, for many, it isn’t great short term. They do not want pay rises to counter inflation and the cost of living because they see that as just levelling out rather than making up the difference. The issue is that many see this as we want to pay less but charge more to get out of the situation. On paper, that may look like the answer, but people do not agree in everyday life, as this contributes to the cost of living crisis.
What does the percent (%) mean?
At a rate of 6%, you will pay an extra 6p for every £1. So, for every £1 borrowed, you will pay £1.06 back. For every £1000, you pay an extra £60. If your mortgage is £100,000, you owe an extra £6000. When you look at 2021 rates at 2%, this would be £2000 for every £1000, so now you are paying three times as much interest. This is what is driving monthly repayments up by hundreds of pounds.
Suppose you already have a mortgage and renewing. In that case, this will put affordable monthly repayments in 2021 to now unaffordable monthly repayment, not helped by inflation and prices of everything else that has increased. For this reason, mortgage rates have been in all the headlines as of late.
Additional factors come into play when % goes up, and it is more difficult to determine a variable mortgage repayment when the rate rises as fast as they are currently. A primary school teacher told the BBC that her monthly payments go from £550 to £1,200 if she is put on a variable rate at the end of July. The lowest price she could pay is £800, but she would need to extend her mortgage to a 35-year plan.
Will mortgage rates go down in 2023?
Probably not. Unfortunately, interest rates are still likely to climb and are expected to reach 6.5% by the end of 2023. This, of course, is an estimate that could come down slightly or even increase further past 6.5%. According to the think tank the Institute for Fiscal Studies (IFS), the real-life effect could result in a household’s yearly disposable income falling by 20%. This doesn’t sound much, but when you factor in the cost of living crisis and all your other bills increasing, a disposable income for many is sadly not even feasible. For a more in-depth analysis, please refer to The Times Money Monitor article Will UK mortgage rates go down in 2023?
What happens if a mortgage repayment is missed?
There are a few outcomes for missing mortgage repayments, but initially, your lender will inform a credit reference agency to tell them that you missed a payment. This will directly impact your credit rating, which could result in difficulties in getting further credit.
A positive is that your lender will not harass you about making payments. They will contact you and, more often or not, offer you help or solutions. One way in which they may help is by offering an interest-only repayment. This means you are not paying off your mortgage but the interest owed to your lender. This may sound awful, but it ensures you are still paying your mortgage and will prevent further credit issues and missed payments. If you fail to pay four consecutive payments, then that is when a lender could begin a foreclosure against you. This is when they could send bailiffs to acquire payments or, in the worst scenario, seize your home.
This can sound scary, but there are many ways in which it will not come to a seized home. The best thing you can do is contact your lender and ask for help. Most lenders are approachable and provide you with as much support as possible.
Can I end or renew a mortgage agreement early?
The short answer is yes, but it is not straightforward. This will be down to the agreement that you currently have, so you will need to check your terms and conditions. Sometimes you will have to pay extra to do so, but often there isn’t a penalty for doing so. If you want to pay off your mortgage before the term ends, you will get a charge for that. It is advised to contact your lender to see if it is possible to end an agreement early or if there is a better deal that they can put you on. Again, this could result in extra payments and longer terms.