According to an analysis by mortgage broker L&C Mortgages, the cheapest fixed-rate mortgage rates have more than doubled since October last year.
The typical new £150,000 repayment mortgage now costs over £100 a month more than it did seven months ago, an increase of over £1200 a year.
The analysis focused on the cheapest two- and five-year fixed-term contracts offered by the top 10 lenders.
Mortgage rates skyrocket: Those looking for a mortgage deal today will find themselves paying significantly more than those who did so in October
The cheapest average two-year and five-year fixed rates are now well above 2 percent at 2.36 percent and 2.46 percent, respectively, after rising from historic lows of 0.89 percent and 1.05 percent, respectively, last October.
For someone paying off a £150,000 mortgage over 25 years, the cheapest typical two-year solution now costs £662 a month, according to L&C, compared with £558 a month in October.
Soaring interest rates have pushed up mortgage costs since it was first hiked in late 2021. It has risen from 0.1 percent in December 2021 to 1 percent today.
The rapid increases in the base rate have also impacted lenders’ default variable interest rates. These are the higher variable interest rates that borrowers fall on once their initial deal is finalized.
The average standard variable interest rate among the top 10 lenders rose to 4.34 percent this month from 3.82 percent in October.
For a typical £150,000 repayment mortgage over 25 years, that’s the difference between paying £777 a month and £820 a month.
|type of mortgage||Average course October 2021||Average price May 2022|
|Two years fixed rate||0.89%||2.36%|
|Five years fixed rate||1.05%||2.46%|
|Variable default rate||3.82%||4.34%|
David Hollingworth, Associate Director at L&C Mortgages, said: “The market is moving at breakneck speed as lenders try to manage their product range and loan volumes, often resulting in products lasting days instead of weeks.
“This presents a real challenge for borrowers trying to keep abreast of market movements, but with mortgage rates continuing to rise, it’s even more important for borrowers to stay on top of their mortgage.”
Should you overpay to avoid future increases?
Mortgage rates are expected to continue rising throughout the year. Some economists warn that the key interest rate could rise above 2 percent by the end of 2022.
According to Bank of England research, nearly £5.1bn was sold in the first three months of this year.
L&C examined the cheapest two- and five-year mortgage deals from the top ten lenders, covering 60 percent of property values between March 2021 and now
For those worried about the prospect of higher rates when they remortgage, overpaying to pay off their mortgage faster could be a solution — but only if they have the means to do so.
Most fixed-rate mortgage deals allow borrowers to overpay as much as 10 percent of the total outstanding amount annually without incurring prepayment penalties. Some are more flexible while others can be more restrictive.
Alex Winn, a mortgage broker at Habito, said, “The number one reason to prepay some or all of your mortgage is that it can save you a lot of money.
“This is because mortgage rates are typically much higher than savings rates.
“If you have a sum of money stashed away in a savings account, you are earning less interest than you are paying out on your mortgage.
“If you can save the money and pay off that amount on your mortgage, you’re better off in the long run.
“Early repayment of the mortgage also gives you freedom and security.”
However, with high inflation and the cost of living crisis, there are reasons why paying off your mortgage early may not be the wisest option.
How much can be saved by overpaying?
Alex Winn, mortgage broker at Habito, gave the following example:
If you had an outstanding mortgage debt of £100,000 that needed to be paid off over the next 20 years at an interest rate of 3 per cent, your monthly payments would be £474.
If you decide to add a further £100 each month (a total of £574) you could pay off your mortgage a full five years and 11 months earlier and save £10,805 in interest alone.
With the same mortgage but a lump sum payment of £10,000 (10 per cent of the balance) you could pay off your mortgage three years and six months earlier and save £10,023 in interest payments.
First of all, you need to make sure you have enough cash reserves.
“If you’re using your savings to pay off your mortgage early, make sure you don’t empty your account and go short,” says Winn.
“Keep enough reserves to cover three to six months of subsistence — and a little extra for the unexpected.”
It would also make sense to pay off more expensive debt first, since mortgage rates are typically lower than other types of credit.
“If you have credit card debt, an overdraft, or unsecured personal loans, you should clear those first,” adds Winn.
“Otherwise, you could end up paying out a lot more interest than you would save by paying off your mortgage.”
Cost Reduction: Overpaying on a mortgage can help homeowners get out of debt faster, thereby lowering the overall interest they pay
It’s also important to avoid overpaying too much and being hit with early repayment fees, as it could make the whole cost saving seem pointless.
Early repayment fees typically range from 1 to 5 percent of the total mortgage amount.
The amount you have to pay tends to decrease as you get closer to the end of your current deal.
“Make sure you get the timing right,” Winn says, “it’s always best to refinance when you’re nearing the end of your current fixed-rate mortgage contract. This is how you avoid prepayment penalties.’
“Yet there are times when it’s worth paying an early repayment fee — for example, when the amount you’re saving exceeds the cost of the fee.”
What about a shorter term or an offset mortgage?
Shortening the mortgage term is another option for homeowners. This is the number of years you agree to pay off your mortgage – typically 25 years.
By shortening the term of a mortgage, a borrower spreads their repayments over a shorter period of time and increases monthly costs.
This means there is less time to accrue interest and the total amount payable decreases.
For example, someone with a £200,000 mortgage paying the same interest rate over 40 years would expect to make monthly repayments of £660. However, you would pay £316,647 over the life of the mortgage.
Someone with a £200,000 mortgage paying 2.5 per cent interest over 20 years would be expecting monthly repayments of £1,060 and paying a total of £254,379 over the life of the mortgage. This would save the borrower £62,268.
Switching to an offset mortgage could be another option for homeowners. This is a mortgage linked to a savings account with the same provider.
When you top up the savings account, your mortgage balance is reduced by the same amount.
For example, if you have £10,000 in your savings account and have £100,000 left over on your mortgage, you only have to pay £90,000 in interest on a netted mortgage.
With lower interest payments, you could afford to invest more in your savings, and that money will ultimately help pay off your mortgage balance.
The best mortgage rates and how to find them
Searching for a mortgage can seem confusing due to the wide variety of deals on offer.
This is Money has partnered with independent toll-free mortgage brokers L&C to help you find the right home loan.
With our mortgage calculator, you can filter offers to see which match the value of your home and the amount of the security deposit.
You can also compare different fixed-rate mortgage terms, from two-year to five-year to ten-year terms, showing monthly and total costs.
Use the tool at the link below to compare the best deals, taking into account both fees and tariffs.
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