How To Pay Less For Your Next Mortgage – Forbes Advisor UK

Clock ticking on your current cheap mortgage deal? There are several options to consider, writes Mark Hooson

With Bank of England interest rates at a 15-year-high and rocketing levels of inflation not seen since the early 80s, the days of ‘cheap borrowing’ appear to be largely behind us.

It’s an especially bitter pill to swallow for the more than 1.4 million homeowners coming to the end of cheap mortgage deals this year (according to Office for National Statistics data) – as the market looks very different to when they last took out a home loan. 

When a mortgage deal – such as a fix or discount – ends, borrowers usually revert to the lender’s standard variable rate (SVR). And this means monthly repayments are likely to rise significantly. 

The average lender SVR is currently 6.98% according data from our mortgage partner, Better.co.uk (formerly Trussle). Homeowners with a £200,000 repayment mortgage who had been paying a rate of 2% would see their payments soar from £848 to £1,411 – a rise of nearly £563 a month. 

Many homeowners will look to avoid this scenario and remortgage. But what can they expect to find? And what could be the cheapest route?

Here’s a little more on the different options available. Bear in mind that each situation is different and it’s prudent to seek advice from a mortgage broker.

Fix for longer

Fixed rate mortgages offer the opportunity to fix your monthly mortgage payments at a set amount for an agreed period of time, regardless of what happens in the market. During the agreed term, the lender cannot increase the rate of interest.

It used to be the case that two-year fixed-rate mortgages offered the lowest rates of interest when compared to three- and five-year fixes, because the longer-term security would effectively cost more. However, because of current economic conditions this is no longer the case.

According to Better.co.uk, the average cost of a two-year fixed rate deal – across all deposit levels – currently stands at 4.71%. Average costs of a three-year deal is pegged lower at 4.49%, while five-year fixes are cheaper still priced at 4.28% on average.

Better.co.uk says the most competitive deals are, at the time of writing, 4.08% for a two-year fix, 4.14% for a three-year, and 3.86% for a five-year.

So, it may be that you can lower your potential mortgage costs by locking in a rate for a longer period than the popular two-year term. 

An added benefit to taking a longer-term fix is that it can save money on mortgage arrangement fees. For example, if you took a two-year fixed rate deal, you could end up paying two sets of fees over the next four years. If you were to choose a five-year deal, only one lot of fees would be payable, however.

According to data from Moneyfacts, the average mortgage fee across all fee-charging fixed and variable rate mortgages is currently £1,071. And generally, the lower the rate, the higher the fee.

However, while longer-term fixing is great for peace of mind and advantageous if mortgage rates continue to rise, if rates start to fall it means missing out on cheaper deals. 

Tracker mortgages

Another option is a variable rate mortgage – such as a tracker. Tracker mortgages offer a rate of interest that mirrors movements in the Bank Rate by a given margin. Currently the Bank Rate is 4.25%, although it was as low as 0.1% in December 2021.

When Bank Rate is low like this, or falling, borrowers can benefit from cheaper mortgage rates – although lenders typically enforce a ‘collar’ which is a minimum rate of interest the loan can fall to regardless.

However, tracker mortgages mean monthly repayments can change during the term of a loan, depending on what happens to interest rates. This can make budgeting more challenging as you won’t necessarily know how much your mortgage will cost in the months ahead.

For example, your monthly mortgage repayments will have risen 11 times if you took a two-year tracker in December 2021.  

Tracker mortgage deals usually last for between two and five years. 

Better.co.uk data shows the average two-year tracker rate today stands at 4.85%. It’s roughly in line with the 4.71% two-year fixed rate equivalent but, of course, has the potential to fall as well as rise.

Discounted variable rate mortgages

Discounted variable rates are similar to trackers, but instead of being pegged to the Bank Rate, they follow a lender’s SVR. 

An SVR is the default rate a lender charges customers whose mortgages have come to the end of their term – and it tends to be uncompetitive. The average SVR is currently 6.98%, according to Better.co.uk.

A discounted variable rate charges a percentage below the SVR. With a 2 percentage point discount on an SVR of 7% for example, the initial rate would be 5%. Better.co.uk data shows the average discount variable mortgage rate is 4.80%.

As lenders are free to adjust their SVRs as they see fit, borrowers on this kind of deal are exposed to fluctuations in monthly mortgage payments. But on the plus side, if interest rates fall, it’s likely – but not certain – that the lender’s SVR will fall. 

SVR deals are also flexible as they don’t charge early repayment charges (ERCs) which penalise borrowers for breaking ‘tie-ins’ that apply usually to the duration of a mortgage deal – say for two, three or five years. ERCs are charged as a percentage of the outstanding loan and can be cripplingly expensive.

Discounted variable rate mortgages usually last for between two and five years. Arrangement fees are often still payable on both tracker and discount deals but can be lower than on fixed rate deals.

It’s important to weigh up any fee against the mortgage rate over the duration of the deal – a mortgage broker can do this on your behalf.

What deals are available right now?

Use our live mortgage tables, below, to find out what deals are available at various deposit amounts and property values. You can order by lowest rate or lowest fees over various terms and mortgage types.

Going interest-only

If you are going to struggle to make payments when it comes to a remortgage in the ‘new world’ you could apply for an interest-only mortgage. 

However, this will only work if you can provide evidence that you’ll be able to afford the lump sum to pay off the mortgage at the end of the term. These deals can be more tricky to be accepted for than a standard repayment mortgage which repays both capital and interest every month.

Applying for a repayment holiday

Depending on your lender and personal circumstances, you may be able to get some temporary respite by applying for a mortgage payment holiday.

This is a temporary pause or reduction in your mortgage repayments. In some cases this can be for as long as six months.

Not all lenders offer repayment holidays, and those that do have specific eligibility requirements. For example, you may only be eligible for a holiday if you’ve previously made overpayments, or your loan to value ratio is below a given threshold.  

Some lenders may offer a repayment holiday if your circumstances have recently changed. For example, if you’ve been made redundant and are struggling to make your repayments.

For as long as you pause your repayments, you’ll accrue interest on your mortgage balance. As a result, your repayments may be higher once they resume. It’s also likely that your credit score will be affected. This could make it harder to get credit in future – including remortgaging.

Repayment holidays should be considered a short-term solution, and are not appropriate if your income or ability to repay has permanently changed.

Get advice – and get prepared

Now, perhaps more than ever, it’s important to seek the advice of a fee-free mortgage broker who will walk you through available options when it comes to your next mortgage – ensuring it’s the right choice for your budget and circumstances.

You can also book a deal in a new mortgage deal up to six months in advance with no obligation to proceed. Especially if rates continue to rise, you have nothing to lose by doing this, and everything to gain.