Research by UK Finance shows about 800,000 fixed-rate mortgages are due for expiry before the end of 2023 and a further 1.6 million by the end of 2024. Many homeowners will face an increase in comparable fixed-rate terms as UK base rates have risen from just 0.1% in November 2021 to the current rate of 5%. While there is a degree of uncertainty, it is crucial to remain focused and consider all the options when renewing your mortgage.
Switch to standard variable rate
When you come to the end of the fixed-rate term on your mortgage, if you do nothing, you will switch to your lender’s standard variable rate. Currently, the average standard variable mortgage rate is in excess of 8%. Those moving from a fixed rate of between 2% and 4% will see a significant increase in their mortgage repayments.
Switching to a standard variable rate offers a degree of risk, with UK base rates expected to increase before the end of 2023. Alternatively, if base rates were to fall in the short term, switching to a variable rate, with the potential to take out a fixed-rate mortgage on a lower rate, could be beneficial. However, many homeowners prefer a degree of certainty and may look to short-term fixed rates when their current arrangement ends.
Switch to a new fixed rate
Unsurprisingly, many people took advantage of historically low-interest rates in recent years to secure a low fixed-rate mortgage. With around 800,000 mortgage holders coming to the end of their fixed term, some will be faced with an increase of two, three or even four times their previous rate. To put this into perspective, every percentage point increase in your mortgage rate equates to £50 more each month (£600 a year) per £100,000 of mortgage debt.
The ongoing degree of uncertainty has prompted some homeowners to consider short-term fixed rates so they at least have a degree of visibility. Even though experts believe UK base rates will start to fall towards the end of 2024, nothing can be taken for granted.
Remortgage on a longer term
Historically, the average UK mortgage has had a 25-year term, although recently, due to financial difficulties, this is now approaching 30 years. As the cost of living crisis continues to put pressure on household budgets, it may be an option to remortgage on a longer term, thereby reducing your monthly payments. The obvious downside is that you will pay more interest throughout your mortgage but alternatively face the potential risk of losing your home. It may be an option for some people.
Reduce mortgage using savings
Even though savings rates have increased recently, they are still significantly less than a typical fixed or variable-rate mortgage. While many households are struggling, some homeowners have savings which could be used to reduce their mortgage capital on renewal. While a “rainy day fund” can be helpful in these difficult times, this has to be balanced against reducing your mortgage capital requirement and the long-term interest savings.
Any reduction in the loan-to-value ratio will reduce the risk to the lender and should see the headline mortgage interest rate fall. If you are faced with a mortgage renewal, it is vital to take professional advice.
Release equity
Many of the so-called baby boomers are sitting on a significant equity element in their property while struggling to balance their daily financial budget. In this scenario, it may be possible to release equity by taking out a larger mortgage while appreciating the affordability test and LTV ratio. This could be extremely useful where homeowners have other high-interest debts, with equity in their property seen as dead money.
Conclusion
While there are several options for those faced with a mortgage renewal in the short term, the most appropriate route will depend on individual circumstances. Consequently, you must take professional advice regarding your mortgage and broader finances to identify the best solution for your situation.