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Seven options if you’re coming to the end of your mortgage fix

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28/09/2022
Homeowners are rightly concerned about the pace of rising interest rates and if you’re one of the two million households whose mortgage deal expires soon, here are seven options you can take.

Following the mini Budget last week, the pound dived to a new low against the dollar and nervous lenders withdrew their mortgage products as the markets priced in rates reaching 6% next year.

Overnight, a record 935 mortgage deals were pulled from the market, the biggest drop in more than a decade, data site Moneyfacts revealed.

For the 895,000 on their lender’s standard variable rate (SVR) and the 715,000 on trackers, further rate hikes are imminent.

And while the 6.5 million households on fixed-rate deals are somewhat cushioned amid the rising rate environment, they will face a “bill shock” when they approach their fixed rate renewal.

Here are seven options if you’re approaching the end of your mortgage fix:

1) Lock in a deal up to six months in advance

Getting organised is key, according to mortgage experts. Graham Taylor, managing director at boutique broker Hudson Rose, says the ability to secure a mortgage deal up to six months in advance “is the most important weapon in your arsenal”.

Meanwhile Mike Staton, director at Staton Mortgages, says he’s seen customers who want to fix for security as well as those who want to weather the storm and “hope the rates calm down”.

He adds: “There is no right or wrong answer at the moment, you just need to make sure that you get advice and that you are comfortable with the advice you are taking.”

Taylor adds it’s good practice to “wargame” what your situation might look like at various interest rate levels.

“A decent broker will be more than happy to do this for you. You should then look to see if you can save any money before your mortgage costs increase to help ease the transition.”

2) Overpay on your current mortgage to move up the loan-to-value band

If you can afford to pay more off on your current mortgage, this could help when it comes to remortgaging.

Sabrina Hall, mortgage and protection adviser at Kind Financial Services, explains: “If you are close to a threshold where rates get cheaper then making an overpayment might be beneficial. So, for example the rates can differ between a 60% deal and a 61% deal so if that means paying a small overpayment to benefit from the lower rate, it might be worth considering if it’s an option for you.”

3) Break your mortgage contract and pay a penalty

Mortgage deals often come with a term which means if you break the contract early, you’ll pay an Early Repayment Charge (ERC).

This could be a flat fee or a diminishing amount but it could be hundreds or even thousands of pounds. However, it can be added to your new borrowing, so the cash doesn’t have to be stumped up in advance.

Matthew Poole, director at Poole Family Financial says he would “encourage” anyone with a mortgage rate due to expire in the next 12 months to review circumstances now.

He says: “You can typically secure a new interest rate up to six months in advance with the majority of lenders so you may need to pay an ERC if you redeem your mortgage early.

“These can be factored into your new mortgage borrowing. Let’s say you have a fixed rate ending in September 2023 and you’re concerned about current rates.

“Securing a new deal now will take you to around the start of April 2023, if you redeem the mortgage then – you’ll need to pay an ERC, which you can factor into your new borrowing.

“You can then review the market again before completing to take stock of interest rates in Spring 2023. If they are comparable to what they are now then you could reapply for a new mortgage to take you to the end of your fixed rate in September 2023. If they have sky rocketed, you can complete on the rate already secured to avoid the peak in interest rates that we may see next year.”

4) Extend the term of your mortgage

Many people think of their mortgage “as a very static thing”, according to Scott Taylor-Barr, financial adviser at Carl Summers Financial Services.

However, homeowners may be able to extend their repayment term giving flexibility and providing households with a “powerful financial planning tool”.

He says: “At the moment, with rates rising, one of the options some people may have is to extend the overall mortgage term, so reducing their monthly commitment to the lender to a more comfortable level.

“The key thing here is to then reduce the term again at future mortgage reviews if and when rates fall, or you receive a pay rise.”

5) Borrow to save

It may seem counter-intuitive to raise mortgage debt at a time of rising rates, but Ranald Mitchell, director at Charwin Private Clients says some debt refinancing could be beneficial.

Mitchell says: “Now’s the time to look at wider household economics. Mortgages are not the only debt that people have to consider and an upsurge in debt refinancing echoes the sentiment that consolidation is a good way to provide a substantial buffer against rising costs.”

He says that this week he has seen a legal professional carrying £182,000 of unsecured debt, and restructuring has reduced outgoings by over £3,000 per month.

6) Speak to your broker or lender if you’re struggling

Sam Richardson, deputy editor of Which? Money, says: “If you’re struggling to pay your mortgage bills, talk to your lender about what support it could offer. This could include a temporary payment holiday, lengthening the term of your mortgage to cut your monthly instalments or switching you temporarily to interest-only repayments.”

7) Do nothing and revert to the Standard Variable Rate

You may be tempted to bury your head in the sand, but this isn’t a wise decision. When you come to the end of your fixed mortgage deal, if you don’t remortgage, you’ll be placed onto your lender’s default or revert rate, known as the Standard Variable Rate (SVR).

Lenders are re-pricing at pace but just last week, the difference between the average two-year fixed mortgage rate and SVR stood at 1.16%, with the cost savings to switch from 5.40% to 4.24% a difference of approximately £3,213 over two years. A rise of 0.50% on the current SVR of 5.40% would add approximately £1,443 onto total repayments over two years, according to Moneyfacts. However, this differential is likely to be wider now given the recent market turmoil.

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