Despite the current mortgage price war, could we be facing the end of cheap mortgage deals? With inflation on the rise, it is not surprising that the Bank of England is saying it will increase interest rates next year. Borrowers have enjoyed record low rates for years, but could mortgages be the next thing to get more expensive?
I investigate how a hike in the base rate could impact your mortgage – and what you can do about it.
[top_pitch]
Base rate and mortgage rates
The news of late has been focused on ultra-low mortgage deals. Several lenders have launched sub-1% fixed-rate products, and we have seen competitive deals even for those with a smaller deposit.
However, the reality of an increase in the Bank of England base rate is becoming more real by the day. Inflation is expected to hit 4% this year, and one of the ways the central bank can combat this is a rise in the base rate.
To understand why this could mean the end of cheap mortgage deals, we need to look at the correlation between the base rate and mortgage rates.
The higher the base rate is, the higher the swap rate will be. The swap rate is the price at which lenders can borrow money. If it’s more expensive to borrow money, then they charge more when it comes to mortgage rates.
Swap rates have already risen from 0.7% in August 2021 to 0.95% currently.
Securing a fixed-rate deal
If you are already on a fixed-rate mortgage deal, then an increase in the base rate is unlikely to affect you right now. But if you are nearing the end of your term – or you are on a tracker mortgage or your bank’s standard variable rate – then it may be time to think about getting a fixed-rate deal.
A fixed-rate mortgage is one where you pay the same throughout the length of the deal. So if you take out a two-year fixed-rate mortgage at 1.1%, you will pay that same interest rate for the full two years of the term.
You can typically fix your rate for two, five or 10 years. However, the cheapest deals tend to be attached to shorter terms.
What you may not know is that you can lock in a new rate up to six months before your deal ends. So if you are starting to get worried about a rise in interest rates and you are in that window, you can start shopping around now.
Fixing your rate may mean that you don’t benefit if the base rate is lowered. But considering it is currently at 0.1%, there’s really only one way it’s going to go. What a fixed-rate mortgage deal does give you is the security of knowing what your repayments are going to be each month.
[middle_pitch]
What to look for in a mortgage
The interest rate is just one part of the mortgage. When looking for a new deal, you also need to think about affordability, type, mortgage term and flexibility.
It is likely to be one of your biggest outgoings, so making sure you get a deal that suits you is important. It is also a good idea to use a broker. They will be able to compare several deals and advise you on which suits your circumstances best.
You can also use a mortgage calculator. This handy tool will give you an idea of how much you can borrow and what your monthly repayments will look like.
