In November, the Bank of England (BoE) hiked interest rates by the largest amount since 1989. The base rate has now risen eight times since December 2021, from 0.1% to 3%, as the BoE tackles soaring inflation.
You probably also saw news headlines in the aftermath of September’s “mini-Budget”, which showed that the cost of borrowing rose sharply after former chancellor Kwasi Kwarteng’s poorly received speech.
So, if you have a mortgage, you may be rightly concerned as to what might happen in 2023 and beyond. Read on to find out what you need to know about interest rates and your mortgage in the next few months.
Double-digit inflation has seen the BoE respond with interest rate hikes
Since December 2021, the BoE have increased the base rate eight times – most recently with the largest single hike for more than 30 years.
While there are many reasons that mortgage rates are rising, perhaps the most significant is surging inflation. Inflation has risen to a 40-year high in 2022 as supply chain issues and the Russian invasion of Ukraine have caused the cost of goods and services to soar.
In turn, the BoE has repeatedly increased the base rate. The aim is that, by doing so, it encourages saving, dampening the demand for goods and services and bringing down inflation towards the BoE’s 2% target.
The market reaction to September’s “mini-Budget” also increased the cost of borrowing. Indeed, the Guardian reports that BoE governor, Andrew Bailey, said the extra stimulus provided in the statement would add to inflation and force the Bank into tougher-than-expected action.
While rising interest rates are good news for savers, as interest rates on savings accounts have begun to rise, it is bad news for borrowers as the cost of mortgages increases.
Indeed, according to data from financial analysts Moneyfacts reported by the BBC, the average rate for two-year fixed rate loan rose to 6.53% in mid-October, the highest level since August 2008.
Whether your repayments change in 2023 depends on the deal you have
If you have a fixed-rate mortgage, you’ll benefit from your repayments remaining the same until the end of your fixed-rate period.
If you have a discounted- or variable-rate mortgage, your repayments will likely have risen over the last few months as your lender has increased their standard variable rate (SVR).
If you have a tracker-rate mortgage that follows the BoE base rate, you will have seen your interest rate and repayments rise sharply over the last 12 months.
So, what is likely to happen in 2023?
If you have a variable- or tracker-rate deal, you are likely to see your repayments continue to rise in 2023. The Guardian reports that Goldman Sachs predict interest rates to peak at 4.75% while Schroders predict that the base rate will rise to 4%.
If your mortgage deal is coming to an end over the next few weeks or months, it’s likely that any new deal you’ll take out will be at a higher rate than your current deal.
Research published by Mortgage Solutions reveals that more than half of all borrowers will see their fixed-rate mortgage deal end in the next three years, meaning millions of borrowers will be seeking an alternative deal.
Many borrowers have benefited from very low fixed-rate deals over the last few years – often at interest rates of between 1% and 2.5%. If you’re one of them, you’re likely to see your interest rate jump sharply when you come to negotiate a new deal.
Indeed, Moneyfacts reports that, as of 8 November 2022, the lowest two-year fixed-rate deal available to borrowers switching their mortgage was 5.64%.
As an example, if you have a £300,000 repayment mortgage with 20 years left to run, and you’re moving from your current deal at 2% to a new deal at 5.64%, you can expect your monthly repayments to rise by around £570 a month (using the Which? mortgage calculator).
Speak to an expert if your deal is coming to an end or you’re planning to buy a property
If your mortgage deal is coming to an end in the next few months, most experts suggest looking at your options sooner rather than later. Here are a few handy tips:
Speak to an expert well in advance of your deal ending
Many lenders will honour mortgage offers for anywhere between three and six months, and so you can lock into a deal well in advance of your existing product coming to an end.
Consider reducing your balance
The end of a fixed- or discounted-variable deal is often a good time to repay capital to your mortgage.
Once your deal ends, you’ll normally be able to pay a lump sum off your home loan without incurring an “early repayment charge” (ERC) and so it can be a good time to reduce the amount you owe.
Think about overpaying if you’re on a low interest rate
If you are currently paying a low interest rate, it could be a good time to overpay.
If interest charges are low, more of your overpayment will likely go towards repaying the amount you owe and so it could be a good time to reduce your balance. Most lenders will allow you to overpay up to 10% of your outstanding balance each year without incurring ERCs.
Don’t just accept a deal from your current lender
As you approach the end of your existing deal, your lender is likely to get in touch with you and offer you a new “loyalty” product.
While these deals can sometimes be competitive, they may not be the right choice for you. So, it always pays to talk to a mortgage broker first so they can scour the market for you to see if there is a cheaper or more appropriate deal.
Get advice if you’re buying a home
If you’re moving home, or buying for the first-time, it might feel like an uncertain time to buy. The mortgage market is fast-moving at the moment with many deals being withdrawn with little or no notice.
Again, working with an expert here can add real value, as they can navigate the tricky market on your behalf to secure the borrowing you need to buy your dream home.
Get in touch
If you’re worried about the current economic uncertainty, please get in touch. Email info@blueskyifas.co.uk or call us on 01189 876655.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.