On August 3rd 2023, the Bank of England raised interest rates to 5.25%, from the previous 5% – a fifteen-year high. This is expected to rise to a peak of around 5.75% in spring 2024. But how does this impact mortgage rates?
The rise of mortgage rates over the last two years has generally followed the rise in interest rates set by the Bank of England to curb inflation. Fixed-term mortgage rates are the highest they’ve been since 2008 and the current average five-year mortgage rate is 6.24%, compared to 2.64% in December 2021.
However, there are signs that mortgage rates could start to fall again. Some lenders have even been making cuts over the last few weeks. This follows the drop in inflation, which is giving banks more confidence to lend money at a cheaper price. Experts are optimistic that as inflation falls, confidence in the economy will rise and mortgage rates could fall below 5% again.
Coming to the end of a fixed term deal?
With the potential for a decrease in rates, it can be hard to decide whether to fix a new mortgage deal immediately or to use a Standard Variable Rate mortgage (SVR). The SVR has temporarily higher rates on average and the rates can change month to month. However, there is the potential to get a cheaper fixed-term deal if the rates fall. It’s ultimately a gamble that should be considered with the proper financial advice.
Adjusting an existing deal?
The length that a mortgage spans can be extended or shortened based on your needs. Shortening the mortgage term means you can pay it off more quickly. This gives interest less time to build up. However, this also requires an increase in monthly payments that can often be hard to maintain.
Lengthening the mortgage span allows smaller monthly payments, which can reduce the financial burden of the mortgage month to month. The downside is that ultimately more money must be spent repaying the mortgage due to the compounding effect of interest. These options could be helpful depending on your individual position. We take a look at an example below…
Worked Example
For example, take a £100,000 mortgage. Let’s say, in this example, the interest rate is 5%, and you could either pay it back over 10 or 12 years.
- Due to the interest, after 10 years the mortgage be worth £127,279. After 12 years, £133,184.
- If you pay back the loan over 10 years (120 months), that roughly averages to 127,279/120 = £1061 per month.
- If you pay back the loan over 12 years (144 months), that roughly averages to 133,184/144 = £925 per month.
We used the help of Halifax’s online mortgage calculator, which you can access here.
Summary
As you can see, with the 10-year plan, you pay more per month, but you pay less overall. Figuring out the best option for you is something a financial advisor such as a mortgage broker can help with. And as always, if you’re looking to buy a new property, take a look at our article on mortgage surveys or get in touch today to find out how we can help.