From fixed to variable to paying a penalty, here’s what you should do about your mortgage after rates skyrocket

HOMEBUYERS are preparing for a bumpy ride.

With interest rates rising and more than a decade of cheap borrowing coming to an abrupt end, mortgage payers are wondering what to do.

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How mortgage rates have risen since the Chancellor’s mini-budget
How your mortgage payments will increase

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How your mortgage payments will increase

Repayments were already rising due to interest rate hikes aimed at fighting inflation, and then the fallout from Chancellor Kwasi Kwarteng’s mini-budget spooked markets further.

This caused lenders to withdraw fixed rate offers from the market for fear of the cost of borrowing.

More than 1,500 mortgages were taken out in the space of two days.

Average rates hit 6% on the remaining two- and five-year fixed contracts yesterday for the first time in 14 years – and experts say there are likely to be further increases.

This raises questions such as: do you have to pay a fee to get out of your current contract and take out a new fixed rate mortgage before the rate goes up again?

The Sun’s Head of Consumer provides expert advice. . .

What should I do now?

Double-check what type of mortgage you have — fixed or variable? – what is your rate, when the transaction ends and what the penalty could be if you leave early.

If you have a fixed agreement, determine when your bills will start to increase and by how much.

For example, consider someone who took out a £200,000 two-year fixed mortgage in December 2021 for a term of 25 years and is paying 2.34%.

They will pay an additional £420 per month when their fixed tenure ends in December 2023, according to Moneyfacts.

Is it worth paying a penalty to get out of my existing agreement?

Many lenders will allow you to lock in an offer three to six months before the end of your current contract.

It’s worth doing your math anyway, but Nick Morrey, Technical Director at Coreco Mortgage Brokers, says, “It’s not an easy math.

If you plan to exit your current contract early, you will need to factor in prepayment charges, as well as the cost of taking out a new mortgage.

And that’s before you start comparing your existing mortgage rate with a new one.

A good starting point to help you do the sums is the Ditch Your Fix calculator from MoneySavingExpert (bit.ly/3T2QEm1).

What’s better, a fixed or variable contract?

Everyone must consider their personal situation to find the best mortgage loan that meets their needs.

Variable and tracker mortgages may currently seem cheaper than a fixed rate deal, but they will rise if – or more likely when – the base rate rises again next month.

Those who value the security of knowing how much they will pay each month should opt for a fixed rate.

Mortgages can be confusing, but a broker can help you navigate the maze.

They can earn a commission from lenders after taking out a mortgage, and some will also charge you a fee, which will either be a flat rate or a percentage of the amount you want to borrow.

Be sure to speak to a broker that covers the entire market, so they can access all available offers, not just a few.

You should always verify that your broker is authorized to give mortgage advice by consulting the Financial Services Registry.

Should I invest my rainy day fund in reducing my mortgage?

Check the fees or penalties you may face if you pay extra on your mortgage.

Many lenders allow you to overpay 10% of the balance each year without penalty, and paying that extra could lower your payments and interest.

But before investing money in your mortgage, be sure to pay off the most expensive debts, such as credit cards, and have enough money aside to pay the equivalent of three to six months of essential bills.

I am a first-time buyer, what should I do?

It might seem like a particularly scary time to take that first leap into home ownership, even with the stamp duty payment threshold for first-time buyers now at £425,000.

But that doesn’t automatically mean that buying a home isn’t an option.

Nick says waiting in case house prices fall isn’t necessarily a smart move.

He adds: “My advice to first-time buyers is that if you are in a position to buy and can afford the mortgage and you don’t plan to sell it in the near future, you should seriously consider going from the front.”

What should I do if I’m having trouble paying my mortgage?

Get in touch with your lender.

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Nick says: “They have a duty to make sure you are aware of your options and to take steps to try to help you where they can.”

You can also get one-on-one debt advice free of charge from Citizens Advice, StepChange or National Debtline.

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