The UK’s base rate is currently at 0.5%, and it's predicted to go up even further to 1% based on two more base rate increases, according to experts from the Bank of England by the middle of next year.
The move was in response to soaring inflation, which the Bank has forecast will peak at 7.25% in April. A representation of the trending increase of RPI is shown in the graph below:
Rising interest rates will increase mortgage costs, making repayments more expensive and increasing the overall size of the home loan. Increasingly, we are seeing many clients consider breaking their mortgage and switching over to a better deal.
We cover the following topics briefly below:
Why Break a Mortgage?
Many borrowers will consider breaking a mortgage if doing so means they can secure a better package with a new lender. With the opportunity to secure longer-term fixed products that alleviate the financial impact of the base rate on monthly payments. If you are thinking of breaking your mortgage, here are some considerations to bear in mind:
Costs of breaking your mortgage
If you proceed to break your mortgage for a more advantageous long-term fixed product, it is crucial to know what the upfront costs will be.
Early repayment costs are in many cases standard and can vary from 2-5% depending on how early the exit is.
The full extent of costs, however, depends on the individual set of circumstances and mortgage product and this would need to be calculated prior to having a discussion about breaking your mortgage.
Accelerated Finance can source and share what fixed rates are available to you, we work with over 50 lenders in the market.
Not waiting until the last minute
Even though you may already have a mortgage in place and you’re not considering moving anytime soon, breaking a mortgage requires time.
A lender's process requires the need to underwrite a loan to assess suitability for the new mortgage, value the property and proceed to legals. This can take as much as 6-8 weeks from the initial application and is even more important if your fixed rate is coming to an end soon.
If you would like to know about our process, you can read about it here.
Current Great Rates in the market
With rising interest rates, it can be easy to assume that the deals in the markets become more limited. The good news is the UK is one of the most competitive mortgage markets in the world. With an ever-increasing lender base competing for business, there are a wider range of products and more relaxed criteria.
Alongside the high competition, the Bank of England plans to withdraw the affordability test for new mortgages.
The affordability test requires lenders to assess whether borrowers could continue to afford their mortgage if their mortgage interest rate increased to 3 percentage points above their Standard Variable Rate.
With the affordability test gone, this will allow lenders to set their own stress tests and interest rates for home loans will make it easier for first-time buyers to get on to the property ladder as affordability criteria will become more flexible.
New Property Purchases
An increase in the base rate can affect anyone thinking of buying a property. By organising a mortgage when the interest rates are currently low vs waiting when they are likely to be higher at the end of this year is arguably the better course of action.
For any decision, it is always important to document all possibilities and explore what the costs will look like for each of the scenarios available.
If the rates are attractive, and you will benefit from the savings of taking out a longer mortgage, negotiating no early repayment fees (ERCs) in your mortgage deal would be wise before proceeding further.
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Your home may be repossessed if you do not maintain repayments on your mortgage