Let’s talk Mortgages and Interest rates

In this month’s blog, we’re taking a look at Mortgages and how they can be affected by what’s going on in the economy at the moment.

These are by no means all the available mortgage options, but here I’ve answered some questions that I often get asked about common mortgage products.

What’s a Repayment Mortgage?

Through the course of a repayment mortgage, each month you will pay off some interest AND a bit off of the loan too. So by the end of the mortgage, you own the house outright. There are a few common repayment mortgage options:

1. Fixed-rate mortgage

This is where you lock in a rate (sometimes called an Introductory rate) for a number of years, commonly 2, 3 or 5 years. By doing this you are safeguarding your loan against any rises in the interest rate for that period (of course you also won’t benefit from any drops in the interest rate), but you are also tying yourself into a contract. That means that should you wish to leave during your fixed rate, you would have to pay an exit fee, also known as an Early Repayment Charge (ERC).

At the end of your fixed rate, you must go through the process of renewing your mortgage again each time or you will be automatically moved onto the lender’s Standard Variable Rate (SVR), which will inevitably be higher than you’re currently paying.

2. Variable rate mortgage

With a variable rate mortgage, you pay a different amount each month according to the interest rate set by your lender (which is based on a number of things, but primarily follows the Bank of England’s Base Rate). This means you will benefit from any Base rate drops, but suffer any rises. The major benefit though of this type of mortgage is that you aren’t tied into a fixed term and can move at any time without incurring fees.

What’s an Interest-only mortgage?

With an interest-only mortgage, you only pay off the interest on the loan. So by the end of the mortgage period, you still owe the amount of the original loan.

These mortgages used to be far easier to get than they are now and were popular because the monthly payments were so much cheaper. They were sold extensively in the 80s and 90s alongside endowment policies which were supposed to accrue the required amount to pay off the property at the end of the mortgage term, but many endowment policies famously underperformed and left people without enough capital to buy their home at the end of their interest-only mortgage. 

Lots of people aren’t in a position to buy their home once their interest-only mortgage has expired. Here are some pitfalls that I’ve experienced with people coming to the end of their interest-only mortgage:

1. They haven’t budgeted and put funds aside throughout the term of the mortgage in order to save enough money to purchase their house at the end of the mortgage period.
2. They planned to get another mortgage but now can’t because of their age, or because the monthly repayments will be so much higher than they’re used to once they move to a repayment mortgage.
3. They sell their home and pay off the interest-only mortgage, but the remaining capital isn’t enough to buy a house of a similar size or in a similar location which results in the need for downsizing or relocating in order to buy again.

Sadly I am speaking with a lot of people in this position right now who are struggling with ‘what to do next’. 

Choosing a Mortgage

The important thing to remember about mortgages is that one size doesn’t suit all. The advice I always give is to speak to an expert (a mortgage broker) as opposed to going directly to one bank or building society. A broker gives you the benefit of a ‘Whole of Market’ search and could find deals specific to your circumstances/budget and other factors which you might not otherwise know about.

So now we’ve looked at some common mortgages, how about the factors that influence them?

What is the Base Rate?

The Base Rate is an interest rate set by the Bank of England’s Monetary Policy Committee. The committee’s job is to ‘balance the books’ for the country. I like to think of it as though the Country is a household with different incomings and outgoings each month. The Monetary committee are responsible for making sure the household is on top of all its bills. When things are tighter, the Base rate is increased to get more cash in (think of an increased base rate as the country pulling a few extra hours), and when things are better, the base rate is decreased (a bit more spare cash and maybe a few more Friday beers for the country).

The reason the Base Rate is important is that it heavily influences Mortgage Lenders’ Interest Rate and Standard Variable Rate.

What is a Standard Variable Rate?

The SVR is the rate that a lender sets which is based in large part on the Base Rate (it’s the Base Rate plus their chosen percentage on top).

In the current climate (Aug 2022), the Base Rate is climbing by the day and is expected to do so for some time still while we are recovering from the impact of Covid on the economy. So most Lender’s SVR will increase in line with this. This will affect you if you’re on a variable rate mortgage, or if your fixed rate mortgage is due for renewal soon.

Last year the average SVR was around 3%. It’s currently averaging at around 5.29% and rising.

I’m on a fixed-term mortgage – does the Base Rate increase affect me?

Not at the moment! But, is your mortgage due for renewal in the next 6 months? If so then you will find that your monthly repayments increase when it comes time to renew – because they’ll be influenced by the Base Rate. There’s not a great deal you can do about this BUT you might find yourself financially better off if you pay your Early Repayment Charge and renew your mortgage sooner – before the rate increases even more.*

*this does not constitute financial advice and may not apply to everyone, please speak to a mortgage broker to find out if this could be beneficial for your specific circumstances.

There’s sooo much to know about Mortgages and Interest Rates that I could write a book on it! Many have! But I hope this simple round-up has cleared up any questions you might have about common mortgage products and how our current economic situation affects them. The best advice I can give anyone in times of uncertainty with your Mortgage is always to speak to a broker – whose job it is to get you the best possible deal on your mortgage – be it new or renewing.

I’m Joanne. I’ve lived and breathed property for longer than I care to remember! This blog is to provide advice and support with problems surrounding property, and life in general.

Previously on the blog…