NEARLY four million households are set to face a mortgage bill shock over the next three years, the Bank of England has warned.
Just under half of mortgage holders will see their bills rise because they’ll be coming off loans they took out when interest rates were at rock bottom.
Some 4.5million fixed-rate mortgages are coming to an end over the next two years, the Bank said.
On average they will see their monthly mortgage repayments go up by £64 – or a total of £768 a year.
However it warned some homeowners will face “much larger increases”.
This is because millions of homeowners took out their mortgages at a time when interest rates were at rock bottom.
From March 2020 up until December 2021, the Bank of England held its base rate at just 0.1% – the lowest it’s ever been – due to the COVID pandemic.
The base rate influences the interest rates offered by banks to mortgage, loans and savings customers.
When the base rate is lower, mortgage rates will usually be lower too and therefore anyone taking out a home loan will benefit from smaller monthly repayments.
The Bank of England started raising interest rates again in December 2021.
Rates hit a high of 5.25% in the summer of 2023 as the cost of living crisis accelerated.
Interest rates have been coming down since then and are now at 4%.
Experts are predicting another base rate cut to 3.75%, in good news for homeowners and people trying to get on the housing ladder.
They are also predicting two rate cuts in 2026, with the possibility of a third.
Meanwhile swap rates – which help determine the cost of fixed rate mortgages – edged down following the Autumn Budget.
A third of mortgage holders, or three million households, will see their payments decrease over the next three years as a result.
But even with these cuts, interest rates will still be much higher than they were between 2020 and 2021.
It means those coming off mortgages with taken out during this time will still face a bill shock.
In its regular Financial Stability Report, the Bank of England said: “Borrowing costs have decreased following recent reductions in Bank Rate.
“But there are still some households that are expected to face higher mortgage payments over the next three years.”
In total over the next three years, 43% of mortgage accounts, or 3.9million, will refinance onto higher rates, according to the report.
This includes both fixed and variable rate mortgages.
What’s happening in the mortgage market?
Expected rate cuts can mean mortgage rates become more competitive – leading to lower monthly costs for first-time buyers and some homeowners.
Those hoping to get on the housing ladder would have more access to cheaper mortgage deals.
Meanwhile homeowners needing to remortgage or those on tracker mortgages (which ‘track’ the Bank of England’s base rate) could also secure lower monthly mortgage payments.
Currently, lenders are slashing mortgage rates ahead of the Bank of England’s expected base rate cut next month.
Barclays slashed the rate of some of its fixed rate deals by up to 0.3%, while HSBC reduced the rates of its deals by up to 15%.
TSB reduced rates on selected fixed rate deals by 0.1%.
Meanwhile, Santander’s fixed rate deals have reached a three year low of 3.55%.
On the flipside, slower interest rate cuts can be good news for savers.
That’s because when the Bank of England cuts its base rate, banks often follow suit by slashing interest rates on savings accounts.
If interest rates remain high, those stashing away cash can get more interest back on their savings.
How to get the best deal on a mortgage
There are different factors that go into getting the best mortgage rate. Chris Sykes, technical director at broker Private Finance explains what you need to know.
The larger the deposit you have the lower the rates you’ll have access to.
The different deposit tiers offered by lenders are generally 0-1% deposit, 5%, 10%, 15%, then generally it skips to 25% and finally cash or equity of 40% or more.
There are some exceptions in between but these are usually the bands.
Lenders then set different rates for each of these tiers, rather than having one rate for a 12% deposit and another for 14%, for example.
With a deposit above 40% there is usually no price fluctuation, which means you’d get the same rate with a 50% deposit to a 40% deposit.
- Keep your credit score healthy
A better credit score doesn’t necessarily mean more competitive deals, but a negative credit could mean worse deals.
For example, there may be some people with not a lot of credit as they’ve never had a credit card, or loan, will get the exact some deal as someone who has more credit history and a better credit score.
However, a bad credit history or score starts to limit your lenders and means you may need to move off high street to a more specialist lender which tends to offer higher rates.
If you have poor credit, look for easy ways to improve it.
- Look six months before your fix ends
It’s best to look at deals six months before a current rate ends. This might be to just have a chat with a broker and get things moving.
It might be that you can get a deal lined up and locked in that protects against movements in interest rates – for example if rates were to go up over the following six months. And you can also then improve the rate within that six months if rates were to go down.
- How to find a good broker
A good mortgage broker is invaluable for navigating the options available to you.
The best way to find a good adviser is through personal recommendations, everyone has a friend or family member who will have recently bought or refinanced – ask them who they used and if they were happy with the service.
You can also lookup reviews of that person online to find other customer experiences too. Unbiased.co.uk is one place where people can offer their reviews.
IF you are looking to buy or remortgage, contact a broker nice and early, as they can then guide you through what the expectations are from lenders.
This gives you plenty of time to make sure your accounts are up to date if you’re self-employed and you can see if it is worth filing tax returns early.
