UK Mortgage Centre: What will my mortgage look like in 6 months?
What will my mortgage look like in 6 months when my deal ends? – Written by our partners at the UK Mortgage Centre
If your fixed rate deal is coming to an end in 2023, then the current rise in interest rates will most likely affect you. You’re probably asking yourself, do you refix your mortgage or move to a variable mortgage, such as a tracker or a discount? And you’re also probably considering what will happen if the market changes and interest rates decline in the coming months.
Choosing what to do next is a big decision and it’s never easy. In this blog, we’ll take you through multiple different types of mortgages, comparing the pros and cons of each, as well as the current mortgage market, to help you make an informed decision regarding your next mortgage move.
The Current Base Rate
There’s been lots of talk about the mortgage market this year and the impact the multiple base rate rises have had on the interest rates on mortgage deals. Since 2021, the Bank of England has raised the base rate 14 consecutive times in total to date.
The base rate is currently sitting at 5.25%.
The base rate refers to the interest rate determined by the Bank of England for lending to other banks. It’s commonly used by banks as a reference point for their own interest rates, although they may not be directly linked. Generally, the base rate reflects the government’s own policies to reduce inflation in the economy.
As intimidating as it seems, don’t be discouraged by the chaotic mortgage market! It’s important to look for the best deal before your current mortgage deal ends. And when you find the deal you want, make sure you act quickly so you don’t miss out.
Fixed Rates
A fixed rate deal is the most common mortgage product in the UK. A fixed deal provides stability within your finances as your repayments will remain the same for however long you choose to fix for, whether it be 2, 3, 5 or even 10 years.
If you choose a fixed rate deal, and the interest rates increase further during your term, you are protected against any further increases in your monthly payments during your term.
However, if you choose to move or refinance during your fixed deal, you may be subject to substantial early repayment charges, so remember to check the fine print on your deal!
PROS & CONS OUTLINED:
Pro – Your payments won’t increase during the fixed term, regardless of how high rates rise.
Pro – Since you’ll have a clear idea of your payment amount, you can plan your budget accordingly.
Con – In the event of a decrease in interest rates, your payments will not decrease.
Con – Should you decide to exit the agreement prematurely, you will typically incur substantial penalties.
It’s anticipated that the average fixed-rate mortgage deal will remain above 4% until 2026.
Variable Rates
As the name suggests, a variable rate means your monthly repayments will vary, they’ll potentially move up and down. Part of the money you pay goes towards the interest charged by your chosen lender with the other part going to repaying the money borrowed.
It’s important to note that if your payments increase, the extra amount doesn’t go towards paying off your mortgage (the money borrowed). Instead, it goes towards paying the higher interest at that time, so you won’t be paying off your mortgage quicker.
There are a couple of types of variable rates, such as:
- Tracker
- Standard Variable Rate
- Discounted Rate
A tracker is generally linked to the Bank of England’s base rate and will sit a set percentage above this; for example, at “0.2% above base rate”. This would mean if the base rate was to change, your rate would always sit above the Bank of England base rate at that set margin. In this example, that means the initial rate payable would be 5.45%.
PROS & CONS OUTLINED:
Pro – Tracker mortgages are often a good option when the base rate is low.
Pro – If you choose a deal with a cap, there’ll be a maximum level your interest rate can’t exceed.
Con – Trackers are variable-rate mortgages; therefore, your monthly repayments can go up without warning.
Con – If your tracker doesn’t have a cap, there’s no limit to what you could pay if the base rate shot up.
Standard Variable Rate
Your lender’s standard variable rate is a rate you go onto after the end of your initial deal if you were to leave your mortgage to run its course. This is also known as a “follow-on rate” and more than likely will be a much higher interest rate than your initial deal. This is where the term re-mortgaging comes from, to prevent you from going onto this standard variable rate.
PROS & CONS OUTLINED:
Pro – If interest rates are lowered, it’s likely that your rate will also decrease.
Pro – Potentially no fee for repaying the mortgage early, allowing you to fully pay off the mortgage whenever you wish without a penalty.
Con – In the event of interest rates increasing, your variable rate will almost certainly increase as well.
Con – It doesn’t provide the payment stability that a fixed rate can.
Discounted Variable Rate
A discounted variable rate is a set margin below the lender’s standard variable rate. While it’s often more volatile than the Bank of England’s base rate, it can offer a large set discount in your initial deal period.
For example, if your lender’s standard variable rate is 8.49%, they may offer a discount of around 3% giving a current rate payable of 5.49%. If the lender decides to increase their variable rate, then this will increase your payments and vice versa. The reason that these rates are a little more volatile is because the lender can pick and choose month to month their variable rate. This can make it difficult to budget and predict your monthly payments.
PROS & CONS OUTLINED:
Pro – Your rate will stay below your lender’s standard variable rate for the duration of your deal.
Pro – If the lender’s standard variable rates are generally low due to the Bank of England base rate’s, you could be paying a very low interest rate.
Con – Your monthly payments are not fixed and can change month by month.
Con – Deals may feature a ‘collar’ which prevents your interest rate from decreasing beyond a certain level, consequently capping the extent of savings you can achieve.
What Are the Current UK Mortgage Interest Rates?
Taking a closer look at today’s rates (10/08/2023), the average interest rate for fixed and variable deals falls between 5-6%.
If you’re considering remortgaging under a fixed deal with an 85% loan to value, the current top offer stands at a 5.44% interest rate. It’s important to mention that this offer does come with a product fee.
How We Can Support and Help You Find a Solution
Our team are experts at what they do. Here’s what we’ll do:
We’ll take some basic information from you and assign a dedicated adviser and case manager to you. Our team will work to understand your financial position, your affordability, and let you know the most suitable deals for you.
We will support you step by step, making sure you understand what’s going on at all times.
The last thing you need is to start searching online late at night for which deal might be the best for your next mortgage, or if your income still stacks up the way it should in the affordability calculators.
That’s why we’re here, to do all the heavy lifting for you and see you comfortably through the process.
Contact us today and see how we can help you!
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**As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments. The Financial Conduct Authority does not regulate some forms of buy-to-let mortgages. The Financial Conduct Authority does not regulate will writing and taxation and trust advice.
***You may be charged a fee, starting from £345, for our advice given. Your dedicated advisor will discuss this further on your free initial phone call.
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