There’s only one question on everyone’s lips this week. “What on earth am I going to do about my mortgage?”
I really do understand the sense of frustration and fear sparked by rising inflation and rocketing mortgage interest rates. As is often the case with so many of the subjects I’ve written about over the cost-of-living crisis, there are no easy solutions, I’m afraid.
What’s going on with mortgage interest rates?
Remember earlier this year when most of the leading economists were predicting inflation in the UK would drop? We were told that as inflationary pressures eased, the Bank of England would drop the base rate towards their target of 2%. That in turn would lead to mortgage interest rates dramatically dropping to not far off previous levels.
Well, those predictions have been dramatically amended now. As of the start of this week, the average two-year fixed mortgage deal was around 6%. Hundreds of deals are being pulled and repriced by lenders, sometimes on the same day. Mortgage brokers are despairing and it looks likely that we won’t be returning to the super low levels of interest any time soon.
All of which has left people coming to the end of their current mortgage deals terrified about what the future might hold. It’s estimated that over 400,000 people are going to need to remortgage from July to September. And according to the think tank, the Resolution Foundation, upwards of 800,000 people remortgaging over the year could face an average increase in bills of £2,900 over the year.
Can we expect any help from the Government or lenders?
As a general rule, Governments rarely directly intervene when the economy gets a bit wacky. During the banking crisis of 2008 they stepped in and over the pandemic a range of schemes were introduced to get us through everything from the cost of energy to the expenses associated with being furloughed.
But this is very much the exception. Rishi Sunak made it clear on Monday that he felt government intervention with mortgage rates could actually stimulate the economy and make interest rates rise further. As I write this, Jeremy Hunt has just said no too. So I think it’s highly unlikely that Government help will happen.
However, there have also been murmurings from Government circles and banks and lenders stepping in to cap interest rates at sensible levels and do more to ensure that people stay afloat.
Lenders have been acting like headless chickens over the past week, so I think we can discount the first option for the immediate future. However, when it comes to the latter, I think we will see a concerted effort from the lenders to ensure that people don’t go under or find themselves facing repossessions. It’s neither cost effective or practical to allow people to lose their homes. So I’m expecting to see a few practical solutions to buy people some time until the worst has passed.
Jane concurs, adding “I think Government support will actually make things worse and I don’t believe it will happen. Michael Gove indicated recently that he feels it is the Governments job to work to keep interest rates low, so that support is not necessary. It’s possible the Treasury will convince the BoE to hold rates so that the effect of current rises can work through the system”.
“I also think that they have to consider renters who will be incandescent if they see mortgage borrowers being “bailed out” for want of a better term, while they are battling to find a property and pay ever-increasing rent. It will also look bad if they are seen to bail out buy-to-let landlords”.
Be warned though. If it’s clear that you can’t afford your property, it may be time to think about selling up and downsizing rather than going bust. No one likes these choices, but a smaller home is better than none.
Jonathan agrees, saying, “I think the lender assistance – or Government help if political pressure builds up – will be offered to those in the worst position. And this will need to happen quite soon. It would be pragmatic – why let owners get repossessed only to then pay more money to support them as overcharged renters?Anything but laser-targeted help will fuel inflation so it’s a tightrope the Government has to walk very carefully”.
What the future holds
So what can we expect over the next year? Jonathan tells me that “If there is no intervention and rates climb, we will see the market fizzle out towards August and not really re-start as we would expect in September. Winter will come early to the property sector as increased cold weather bills compound the problem. If there is an intervention, we will see what you could call a ‘managed slow-down’ without the same threat of repossessions and redundancies in the property sector.
Looking at the bigger picture, Jane adds. “What happens later in the year depends on inflation and monetary supply. Realistically, I think the rates we have now are the new normal – and we are not going to dip below 2% rates again for a long time, if ever. We know that these rates were artificially low but the increases have still come as a bit of a shock. I don’t think the market will crash but I do see prices reducing, especially in more expensive parts of the UK and sellers are going to have to be pragmatic about this. I think that if inflation does start to come down towards the end of the year, then fixed rates will edge back too but this seems more likely to happen in small increments.
What to do if you’re remortageing soon
There’s no getting away from the fact that things are going to be more expensive. But don’t wait till the last minute. Jane suggests you should start making enquiries at least six months of the end of your current deal by speaking to your broker to talk through the options that are available.
Jonathan suggests an offset mortgage might work for some people. If you have savings then this might be a good option. Offset mortgages work by factoring in the cash you have saved and knocking that off the value of the mortgage so you pay less interest on the total amount outstanding. Of course, if you dip in to those savings then the amount you owe increases.
Alternatively, with an interest-only mortgage, you just pay the outstanding interest each month on the mortgage but not the cost of the property itself. Now clearly, you will not end up owning the property unless you have an alternative way of paying off the debt. However, if this is a temporary option, then mortgage lenders may allow you to switch to an interest-only deal long-term.
Another option is extending the term of your mortgage may be an option. While your payments will reduce the interest you pay will be higher. You could be turned down if the new term takes you past what your lender thinks your retirement age will be.
As I mentioned, in the vast majority of cases, your mortgage lender doesn’t want you to go lose your home. But be realistic. Any help you are offered will be based on a realistic assessment of your immediate and ongoing finances. So take some time to make a budget and what the future might hold over the next year. Explain to the lender or a broker about your situation and see what they suggest.
If you’re worried about putting your foot in it, then speak to an organisation like Citizens Advice, or charities like Shelter. They have lots of useful guides and information on their websites.
Featured in Mirror – Martyn James, Jane King and Ash Ridge