Mortgage rates continue to dominate the headlines as the fallout from the Chancellor’s mini-tax cut trickles down to borrowing costs.
While the government has now reversed its decision to cut the top tax rate of 45 pence for high earners, last week’s announcement has plunged the mortgage market into disarray.
Some lenders have taken rates off the market, while others have increased them.
Amid the chaos, one anecdote that caught the public’s attention came from an audience member during last Thursday’s Question Time episode.
Home loans: Lenders pulled mortgage offers off the market last week – but how far are rates likely to rise once they return?
She said the 4.5% mortgage rate she had been offered was withdrawn as she finalized her decision, and she was then offered a new rate of 10.4%.
The studio audience gasped. In cash terms, this would mean that on a £150,000 mortgage, payments would go from £834 per month to £1,406 per month, a huge increase of £572.
But while rates are undoubtedly rising, brokers want to reassure borrowers that the rate quoted on Question Time is not representative of the market as a whole.
Lewis Shaw, Mortgage Advisor at Shaw Financial Services, commented on the clip: “This is going to scare people unnecessarily when many are already feeling vulnerable and worried about their mortgages and their energy.”
On Monday, Oct. 3, the average two-year fixed-rate mortgage across all loan-to-value tranches was 5.75%, according to Moneyfacts analysts. The five-year fixed rate average was 5.48%.
Rate hike: A BBC Question Time audience member shocked the audience by revealing that his mortgage offer had risen from 4.5% to 10.4% at the following the events of the week.
Why would anyone be given a 10% mortgage rate?
Currently, only a few lenders list double-digit mortgage products. Many are “specialty” lenders offering loans to customers with bad credit histories or atypical circumstances, such as the self-employed.
This does not mean that this is necessarily the case for the viewer. Another scenario is that the property was of non-standard construction – for example, concrete rather than brick. But even in this case, rates above 10% would remain rare.
I haven’t quoted a single client a mortgage of 10 percent or more
Alternatively, the advice the potential borrower received may have been incorrect or rushed.
Ashley Thomas, director of Magni Finance, says if your rate seems “significantly higher” than expected, it may be worth getting a second opinion or consulting an independent broker.
Chris Sykes, technical director of mortgage broker Private Finance, said: “On a residential mortgage, I haven’t quoted a single client with a mortgage of 10% or more.
“Most fixed rates for a residential mortgage now fall in the 5% range, with a few outliers in the 4s and 6s.”
Will mortgage lending jump to double digits in the near future?
The short answer is that no one knows, but currently it is unlikely to reach these levels unless there are special circumstances regarding your credit history or your property.
However, interest rates are rising and if you are planning to buy for the first time in the next year or remortgage at a fixed rate, you are likely to pay more than expected.
The Bank of England raised its key rate from 0.1% in December to 2.25% in September, in an effort to curb rising inflation.
This is the first time since December 2008 that the rate has exceeded 2%. Most experts predict that it will continue to rise and could reach between 3 and 6% over the next 12 months.
Unpleasant surprise: First-time home buyers or downpayers may find interest rates higher than they expected – but the typical home loan isn’t currently expected to hit double digits
Although not directly tied to the base rate, interest rates on new fixed rate mortgages generally increase when the base rate rises because banks have to pay more to borrow money.
Last week’s initial market response to the mini-budget saw forecasts for a possible peak in the base rate rise above 6%, but these have now fallen back below 6% following the cancellation by the government of its plan to remove the 45p. .
However, a base rate of 5% is still on the cards. At 5%, mortgage experts say the market would begin to experience “significant stress”.
According to calculations by broker L&C, an increase in the base rate to this level would drive average standard variable rates up to 8.49%, or £1,206.83 per month on a £150,000 mortgage, an increase of £294.83 based on current levels.
“An increase to 5% in the bank rate would make life very difficult for many borrowers when their fixed rates end,” said Raymond Boulger, senior technical director of mortgages at brokerage John Charcol.
What should I do if I need to remortgage?
After last week, when lenders were shooting rates amid the price chaos, the scene changed.
Some lenders who withdrew mortgages have started to come back with new prices, while others are suspending loans for a few more days while things calm down.
If you have a fixed rate or another mortgage that’s coming to an end, it’s worth thinking at least six to nine months ahead and exploring your options.
While things are changing rapidly, most product transfer offers remain in the market – so consider both what your current lender can offer you, as well as consulting a good mortgage broker about the rates that might be offered to you by a new bank or building society.
> Read our guide to remortgaging and what you need to know to learn more
As rates have steadily risen, some lenders have extended the time in which existing customers can complete a new transaction before the end of their current mortgage, sometimes allowing them to do so by up to six months at advance. This allows borrowers to secure a more favorable rate before future increases.
If you have a rate approved rather than just offered, it’s usually good for six months, which means if you got one in April, when the average two-year fixed-rate deal was 2.86%, it could still be valid.
It’s incredibly rare to see lenders pulling approved deals and there’s no current report on what’s happening to homeowners.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed rate contract is coming to an end, or because they have agreed to buy a home, have been urged to act but not panic, written This is Money editor Simon Lambert.
Banks and building societies are still lending and mortgages are still being offered and applications are being accepted.
However, rates change rapidly and there is no guarantee that transactions will last and not be replaced by mortgages at higher rates.
This is Money’s best mortgage rate calculator, powered by L&C, that can show you deals that match your mortgage and property value.
What if I need to remortgage?
Borrowers should compare rates and speak to a mortgage broker and be prepared to act to get a rate.
Anyone with a fixed-rate deal ending in the next six to nine months should consider how much it would cost them to remortgage now — and consider entering into a new deal.
Most mortgage transactions allow fees to be added to the loan and they are then only charged at the time of subscription. By doing so, borrowers can secure a rate without paying costly arrangement fees.
What if I buy a house?
Those who have agreed to buy a home should also aim to get quotes as soon as possible, so they know exactly what their monthly payments will be.
Homebuyers should be wary of overstretching and prepare for the possibility of home prices falling from their current high levels, due to higher mortgage rates limiting people’s ability to borrow.
How to Compare Mortgage Costs
The best way to compare mortgage costs and find the right deal for you is to talk to a good broker.
This is Money’s partner mortgage broker, L&C, told me that mortgages are still available and that you can use our best mortgage rate calculator to view offers that match your home’s value, size of mortgage, term and fixed rate needs.
Be aware that rates can change quickly, however, and so the advice is that if you need a mortgage, compare rates and then speak to a broker as soon as possible, so they can help you find the loan mortgage that’s right for you.
> Check out the best fixed rate mortgages you could apply for
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