How to protect your mortgage from rising rates

Homeowners with mortgage deals about to expire faced another worrying week. New mortgage costs continue to rise – to levels not seen since the 2008 financial crisis.

The Bank of England now says that by next year nearly a million households will not be able to pay their mortgages due to high interest rates. There is also fear of an imminent house price correction.

With the cost of living rising and financial markets in turmoil, this additional burden on families could not come at a more troubling time. But there are steps homeowners can take to protect their finances.

How much did mortgage rates go up?

Just a year ago, a two-year mortgage had an average rate of 2.25 percent – 2.55 percent for a five-year deal. Today, the comparable rates are 6.43 percent and 6.29 percent.

On a standard £200,000 mortgage, a loan at 2.25 per cent would cost £872 a month. At 6.43 per cent, the monthly cost is £1,341.

Worryingly, more than two million households have fixed-rate deals that expire next year and are likely to see their payments increase.

How can I check the amount to be paid?

The best way to compare mortgage costs and find the right deal for you is to talk to a good broker.

You can use Money’s best mortgage rate calculator to view deals matching your home value, mortgage size, term needs, and flat rates.

Be aware that rates can change quickly, so the advice is that if you need a mortgage to compare rates then speak to a broker as soon as possible, so they can help you find the right mortgage for you.

> Check out the best fixed rate mortgages you can apply for

My current mortgage deal is expiring soon – what do I do?

If your deal is going to expire, you need to move quickly to get a new deal. Make sure you have all required documents ready such as payslips and bank statements.

Lenders are very busy – it takes more than four weeks to secure a new mortgage offer. If you stick with your current lender and don’t increase your borrowing, the process will be faster because it avoids the need for new affordability calculations.

Once you have applied, most major lenders will honor the rate offered for the first time. Specialist lenders may not be that flexible.

What if I have six or 12 months left on my loan deal?

Most mortgage offers last for six months, so even if you’re far from having to remortgage, it’s worth starting the process. You can strike a deal early to protect you from any further price hikes. If prices drop after that, you can place a new order.

Make sure there are no non-refundable upfront fees and give yourself enough time to apply for a new deal.

What if you are moving from one house to another?

Mortgages are usually transferrable, so you can take out a loan for a new property and avoid any early payment fees. If you’re upsizing and want to borrow more, you may be able to do so from your current lender — but it’s likely at a higher rate.

Can I switch to an interest only deal to cut my payments?

Interest-only mortgages allow you to pay interest — not to dispose of principal. As a result, payments are lower. But the lender wants you to have a large interest in your home. They will also want to know how you plan to pay off the mortgage at the end of its term.

Another way to reduce your monthly payments is to take out a long-term loan – say, 30 years instead of 25.

But borrowing over a longer period means that you pay more interest over the life of the loan.

Can I request a mortgage payment leave?

This should be the last resort. This will only increase the amount of interest you pay in the long run.

If you have a new job that hasn’t started for a few months, it may be worth taking a payment holiday if you’re finding it difficult to make your current loan payments. If your money is going to stretch, it’s best to talk to your lender as soon as possible.

Will I get a cheaper deal if I have more equity in my home?

Mortgages tend to be cheaper the more equity you have. For example, a five-year 90 percent loan rate mortgage with Virgin currently has a rate of 5.48 percent. But HSBC offers a five-year fix at 5.24 per cent for loan to value up to 75 per cent.

Should I exit my existing trades, pay a penalty and close a new trade before the prices go up further?

Some homeowners are abandoning their lower-priced deals to lock in higher deals now, hoping that prices will go up even more. It is very difficult to know if this will save money in the long run because there is so much uncertainty about the future of interest rates.

If you’re thinking of switching early, be sure to check if you’ll be on the hook for early payment fees. You must take these factors into account.

Alternatively, you can stay on your existing deal and overpay – again, keep an eye out for early settlement fees. This will reduce the total amount of interest you have to pay and get you in the habit of paying a higher monthly amount.

You can also consider saving in a higher paying savings account and using that money to pay off part of your mortgage afterward.

What about buying mortgages?

Interest rates on buy-to-let loans are increasing along with standard loans. This means landlords are likely to have to increase rents for their tenants – or take a financial hit themselves. Some landlords may find that they have to sell some of their properties.

We survived much higher rates in the 1980s – so what’s the problem?

Interest rates in the late 1980s approached 15 percent, placing a huge financial burden on those with mortgages. Today, homeowners take on more debt to service because real estate has become more expensive.

Also, interest rates have been low for many years which means that the sudden increase takes many homeowners by surprise.

Should I hold back until the advisor’s financial statement comes out at the end of this month?

Some financial experts hope that when the financial advisor issues his statement, the current volatility in the financial markets can calm down. However, there is no guarantee that this will be the case, or that it will result in lower borrowing costs.

There are variable rate mortgages available to borrowers who believe that interest rates will not rise as much as expected.

But if they are wrong and the mortgage rates increase further, they will face higher monthly loan payments. Risky approach.