What you need to do now to cut your mortgage costs

·5-min read
Mortgage costs interest rate rise Bank of England
Mortgage costs interest rate rise Bank of England

Millions of borrowers must now find thousands of pounds more each year to pay their mortgage after being stung by the highest interest rates in 14 years.

The Bank of England on Thursday announced the seventh consecutive rise to the Bank Rate, increasing it from 1.75pc to 2.25pc. The 0.5 percentage point rise has pushed the central interest rate to its highest level since 2008.

The rise will serve as an immediate shock to borrowers on standard variable rate and tracker mortgages, of which there are a combined 1.6 million in the UK, according to banking trade body UK Finance, whose interest rates are linked to the Bank Rate.

A borrower with a £250,000 standard variable rate mortgage will see their monthly payments jump by £62 overnight, according to figures by financial analyst Moneycomms and TotallyMoney, a credit app.

Monthly mortgage payments on a £250,000 variable mortgage are now £280 higher following the Bank Rate rise today, compared with November last year, before rates first began to rise.

Borrowers on a fixed-rate deal are not immune to the rate rise. Their monthly payments will not rise overnight, but lenders have been pulling their cheapest deals and increasing rates on a daily basis this week in anticipation of the Bank Rate rise.

Those who have delayed locking into a new rate by a couple of months will now be thousands of pounds worse off over the lifetime of their next deal.

The cheapest two-year fix available at the beginning of July was priced at 2.95pc, but this has now risen to 3.84pc, with Cambridge Building Society, according to broker L&C Mortgages. On a £250,000 mortgage the difference in rates equates to an additional £119 a month, or £2,856 over the two-year deal.

Mortgage brokers have warned banks and building societies will continue to push up prices after today and markets predict the Bank Rate will likely reach 4pc next year.

But there are still ways to navigate the choppy mortgage market and ensure you get the best deal.

Act now, but don’t panic

With the speed at which lenders are pulling rates, it is vital that borrowers looking for a fixed-rate mortgage lock in a deal sooner rather than later and before interest rates rise again.

The cheapest five-year fixed deal is currently priced at 3.54pc, but Simon Gammon, of broker Knight Frank Finance, said the best five-year deals could cost more than 5.35pc by the middle of next year if the Bank Rate continues to climb as predicted.

A borrower with a £250,000 loan would pay £1,257 a month in mortgage payments if they locked into the cheapest five-year rate today, but this would rise to £1,512 a month if they waited until the best rate was 5.35pc next year – an additional £255 a month.

Many lenders offer a mortgage that can be held for six months, and some even nine months, meaning borrowers can lock in an interest rate half a year before they need the loan. "Borrowers that act quickly stand to save a lot of money," added Mr Gammon.

But while time is of the essence, borrowers should avoid panicking and committing to an unsuitable deal, warned Sabrina Hall, of broker Kind Financial Services.

Ms Hall said: “Whilst for most people getting locked in early is a priority, I'd also advise my clients not to focus on rates alone.

“A variable rate is still the best option for some of them if they want flexibility in the future and for some fixing shorter term makes more sense depending on their future plans.”

Leaving a fixed-rate deal early if circumstances change at a later date can incur costly penalties to the tune of tens of thousands of pounds.

Increase your equity

Borrowers with bigger deposits are less risky for lenders and can therefore typically access better rates than those with smaller cash reserves.

Banks use the term “loan-to-value ratio” to label how much they lend a borrower against a property. For example a £180,000 mortgage on a £200,000 home would be a loan-to-value of 90pc.

The lower the loan-to-value and the more equity a borrower puts into the property, the happier lenders will be offering lower interest rates.

Graham Cox, of SelfEmployedMortgageHub.com, said: “Decreasing your mortgage loan-to-value can make an enormous difference.

“If you're just above the next loan-to-value band and you can afford to do it, making an overpayment or putting down a bigger deposit could really help.”

Offset mortgages

Households with a significant cash pile could also save thousands of pounds each year by using it to offset their mortgage, especially when savings rates are so low in comparison to mortgage interest rates.

A handful of banks offer offset mortgages that allow borrowers to reduce the cost of their loan using cash held in an account with the same lender.

For example, a customer borrowing a £600,000 mortgage and with £200,000 in savings would only pay interest on £400,000 of the loan, but will forfeit any interest on the cash pot. Based on a mortgage interest rate of 3.5pc, this would reduce payments from £3,005 a month to £2,003.