Bleak outlook for many mortgage borrowers

Commenting on today’s decision by the Bank of England to increase the Base Rate by 0.50 percentage points to 5.00%, Sarah Pennells, consumer finance expert at Royal London said:

"There seems to be no reprieve in sight for hard pressed mortgage holders following this latest increase to the Bank of England base rate. Although the vast majority of mortgage holders are still on a fixed rate deal, homeowners whose deal is nearing its end face a jump in payments which, for some, may be unaffordable. While those on a tracker rate have seen their rates rise since December 2021, the financial shock will be more dramatic for those on fixed deals who need to remortgage. With rates at historic lows on two-year fixes almost two years ago, borrowers who are about to move off these deals will be seeing much higher monthly mortgage payments.

"When considering the difference between a monthly repayment on a 25-year term mortgage with an average outstanding balance of £127,420, the average rate of a two-year fixed rate in June 2021 compared with the average today, the difference in a monthly repayment is an additional £250 per month, or £6,000 over the two-year term.*

"This is especially concerning when considering Royal London’s cost of living research conducted earlier this year** found that 30% of UK consumers were already moving into their overdraft or needing to borrow funds before the end of the month to make ends meet.

"Even though the average fixed rate mortgage deals on the market may be much higher than the one you have, moving on to a lender’s standard variable rate (SVR) will typically be higher still. It is usually a lender’s most expensive mortgage option. Currently the average SVR is quoted as around 7.37%, but that will likely change in light of the latest rate rise.

"Although savings rates have been improving, they have not been matching the rises in the Bank of England base rate. It is still worth shopping around to see if you can get an account paying a higher rate of interest. Banks and building societies attract new customers by offering their best rates, so it could be worth moving your savings to an account where it would earn more interest."

Sarah’s tips:

1. If you’re nearing the end of your current fixed deal, you can start to look at your options and secure a new deal with a lender around six months in advance of the mortgage start date. If you’re concerned rates will continue to rise, it’s best to act as quickly as you can to put a new fixed rate deal in place and avoid moving on to a lender’s standard variable rate.
2. For borrowers who may find they’re unable to afford their repayment amounts, or fear that they could start to find them unaffordable in the near future, it’s a good idea to contact your lender and mortgage broker (if you’ve used one) to talk to them about your repayment worries as soon as possible.
3. It is much better to have the conversation with your lender early so they can look at available support options with you before you find yourself with any mortgage arrears. Contacting them before you miss payments or as soon as you’re falling short on payments means there may be more options available to you to help make your payments affordable.
4. If you’re struggling with other household bills or you’ve received letters mentioning repossession, contact a free-to-use debt advice charity, such as StepChange, National Debtline or Citizens Advice, straight away.
5. Savers should make sure that they’re making the most of their tax-free allowance and reviewing the rates offered on existing savings accounts as there can be more attractive options out there as providers tend to offer their highest interest rates on new customer accounts.