On March 17 the Bank of England increased base rates to 0.75% from 0.5% after the Monetary Policy Committee (MPC) voted in favour of a rise. This rate is used to charge other banks and lenders when they borrow money, influencing what borrowers pay and savers earn.
It was the third rise in a row after they were first lifted to 0.25% from 0.1% in December last year before being upped to 0.5% in February. It means that today, the cheapest mortgage deals are double what they were in October, according to the Money Saving Expert (MSE) website founded by Martin Lewis, which he later sold on.
In October there were more than 50 mortgage deals below 1%, while the cheapest fix was 0.84%. Today the cheapest is 1.79%, equating to an extra £800 a year on a £150,000 mortgage.
And the website predicts things are set to get worse as further hikes are expected. City analysts Capital Economics expect it to hit 1.25% by the end of 2022 and 2% in 2023.
So what should you do amid the rising rates? We’ve checked MSE and listed the best tips and considerations to help you save on your mortgage – whether you already have one or looking to get one.
1. Nothing will change if you’re on a fixed-rate mortgage – yet
Most mortgage holders in the UK have a fixed rate mortgage, so for most, nothing will change with your existing deal. However, any new deal you remortgage to in the future may now be more expensive. If you’re close to the end of your current term, consider searching for a new mortgage deal now. You can usually lock in a mortgage offer three to six months ahead of time.
If you’ve six months or longer to go on your fix, you’ll either need to wait for your initial deal term to run out, or pay the charge to leave early. MSE’s Ditch your mortgage? calculator can help you decide.
2. What if you’re on a standard variable (SVR), discount or tracker mortgage?
If you’re on the SVR, you’re free to remortgage to a new deal at any time. It’s worth checking if you can as SVRs tend to be pricey, MSE recommends.
If you’re on a discount mortgage that has gone up, you may be able to remortgage without penalty, but you should check. If not, you’ll either need to wait for your initial deal term to run out, or pay the charge to leave early.
If you’re on a tracker mortgage, rates will increase. These track the base rate which means mortgage costs will go up. In general, this is around an £11 increase in your monthly payments on a £100,000 mortgage, MSE reported.
If you’re concerned about this rise, or further rate rises, you should check now to see if you can switch to a better deal. However, make sure to check if there are penalties to leave your current deal now – many trackers do have them. If not, then you’re free to switch to another mortgage.
If you have early repayment charges, you’ll either need to wait for your initial deal term to run out, or pay the charge to leave early. MSE’s Ditch your mortgage? calculator can help you decide what to do no matter what mortgage you have.
3. Dig out the details of your current mortgage
Gathering the following info will help you if you are searching for a new deal, according to MSE:
-What’s the rate? Plus monthly payments and outstanding debt.
– What type is it? Is it a fix, tracker or SVR? See fixes versus variables.
– When is the intro deal over? For example, when does your fix end?
– When must it all be repaid? In 10, 20 or 25 years?
– Will you be penalised to switch deals? Does your fix or tracker have an early repayment charge? If so, it isn’t usually worth switching, though it can be on rare occasions. See Ditch your fix?
– What’s the loan-to-value (LTV)? This is the proportion of the home’s current value you borrow – for example, £280,000 borrowing on a home currently worth £350,000 is 80% LTV. Rates get cheaper the lower your LTV.
4.Should you fix?
The more you value certainty and being able to stick to a budget, the more you should hedge for a fix, and for fixing longer, MSE said. If you’re worried about interest rates rising, then fixing is a bit like an insurance policy against this.
Trackers and discount mortgages are often slightly cheaper, but most move in line with the base rate – for example, people on trackers have seen their rates increase three times since December. Yet if today’s rate is your prime concern and you can ride out moves upwards, you may want to go for it.
5. Use a comparison tool to see the market’s cheapest deals
Sub-1% mortgages have gone, but there are still historically cheap deals out there, reassures MSE. However, it is not known for how long. You could spend a few minutes on the MSE mortgage comparison tool to find your cheapest deal. You should note that low-rate deals can mean higher fees. The tool factors these in to the total cost to make comparing easier.
The biggest factor affecting rate is your LTV. Mortgages start at 95% LTV, but you’ll get a cheaper deal at 90% LTV. It’s cheaper again at 80%, at 75%, and then bottoms out at 60% of a home’s value. There can also be minor gains at each 5% in between.
6. It’s not just about the cheapest mortgage
It’s also about the cheapest mortgage you’ll be accepted for. There are two key financial checks the lender will do on you when you remortgage, MSE said. Unfortunately each lender is different, but there are ways you can improve your prospects.
– Are you creditworthy? A poor credit history can damage a remortgage application, or at least mean you don’t qualify for the cheapest deals. So check your credit to ensure there are no errors, then minimise other credit applications, and pay down debts if you can, MSE advises.
-Can you afford it? Lenders must also do strict checks to see if you can afford mortgage repayments. And with the rising cost of living, it’s only getting tougher, as they’ll look at how much you spend on essential bills when working out whether you can afford a mortgage. They’ll want evidence of income, bills, expenses and sometimes even eating out.
However, lenders don’t just assess if you can afford to repay at current rates. They also test how you’d cope if interest rates rocket, so you’ll need to have a bit of leeway in your finances, according to MSE. Living cheaply in the months leading up to application and not applying for unnecessary credit can help if you’re a bit tight.
7. Get a good broker
As mortgage acceptance gets tougher, a good broker is more important than ever, reports MSE. Lenders’ acceptance criteria differ from one to the next. For example, one lender might include overtime or commission in your income assessment, and another might only count your base salary. Or some lenders are wary of non-standard properties, such as those above shops.
To navigate the maze, MSE strongly suggests you use a mortgage broker. They do the ‘finding a deal’ work for you and have details of most lenders’ acceptance criteria, which aren’t easily obtainable by the public, plus many deals – even some product transfers – that can only be accessed through brokers.
8. What if you’re self-employed?
It can be tougher to get a mortgage if you’re self-employed, so to help smooth acceptance, MSE says to ensure you have two to three years of trading accounts ready, plus three months of business or personal statements. Your pandemic employment record and finances over that time can have a big impact too. If your income’s been patchy over the last few years, a good broker will be vital.
9. Can I save with a green mortgage?
These mortgages give you a discounted interest rate or cashback if your home has an A or B efficiency rating, or if you’re planning on carrying out energy efficiency improvements, MSE said. Yet even if you’re eligible, it’s best to go for the cheapest rate deal you can get – but these aren’t usually green mortgages.
10. What happens if I’m a saver?
The base rate increase is likely to affect all types of saving accounts according to MSE. Generally savers benefit from base rate rises – although most savings rates are still relatively poor and rates don’t go up much. However, unlike mortgages most major providers are still deciding what to do with their savings rates.
Whatever rate you’re on currently, it may be worth waiting a few days to see if best-buy rates improve before switching. You can check MSE’s daily updated top savings accounts here. To get the latest email updates from WalesOnline click here.