Nearly one million households face a painful spike in their monthly mortgage payments this year as their cheap fixed-rate deals come to an end.
Back in 2021, a total of 971,105 five-year fixed-rate mortgage products were taken out, which could have been on interest rates as low as just 0.91 per cent.
That is according to Financial Conduct Authority data obtained via a freedom of information request by comparison website Compare the Market.
Now, when those same borrowers approach their deadline to remortgage, the cheapest rate is a much more expensive 3.51 per cent.
This means a potential £282 per month increase on an average-priced home.
Payment shock: Almost 1million households are coming off cheap five-year fixes this year
What has happened to mortgage rates?
Not everyone can get the cheapest rates on the market, with 2021’s sub-1 per cent deals reserved for those with at least a 40 per cent deposit or equity.
The average five-year fix in 2021 across all deposit sizes reached a low of 2.52 per cent, according to Moneyfacts data. That compares to 4.94 per cent today.
On a £200,000 mortgage being repaid over 25 years that’s the difference between paying £899 a month and £1,162 a month, or a £263 rise.
Those who could get the best mortgages on the market in 2021 would have found the cheapest widely-available deal to be a 0.94 per cent rate offered by HSBC.
Now, the lowest five-year fix for households remortgaging is offered by Barclays at 3.76 per cent.
A £200,000 mortgage being repaid over 25 years at 0.94 per cent would mean paying £748 a month. Increase the rate to 3.76 per cent and the monthly payments on a £200,000 mortgage jump to £1,030, or a jump of £282.
Chris Sykes, property finance specialist and director at mortgage broker MSP Financial Solutions
Are borrowers prepared for the rise?
Chris Sykes, a property finance specialist and director at mortgage broker MSP Financial Solutions says that most people are now prepared for the jump in costs. In fact, he suggests some are surprised their costs are not rising more.
‘There are some people that think that, as the rate is doubling, so will the payments,’ he says.
‘That is only the case on an interest-only mortgage, so some people especially those with a short term left on the mortgage are quite surprised by the smaller than expected rise.’
He adds that many had prepared for the increase, for example by tucking away some of the money they were saving or by making over-payments to bring down their mortgage balance more quickly.
And for all those on five-year fixes who are seeing rates rise, there is another cohort who may see them fall when they come to remortgage.
Those who took out two-year fixed rates two years ago in early 2024 may be on rates of around 5 or 5.5 per cent.
How to cope with higher mortgage costs
For those who fear they may struggle to cope with a jump in their monthly payments, the first thing to do is to make sure they are remortgaging to the best possible deal they can get.
The first thing to do is avoid falling on to their lender’s standard variable rate – the default rate borrowers are put on when their fixed rate ends. This can be 7 per cent or even higher.
It is possible to reserve a new mortgage rate as early as six months before your current one ends. If you then see a cheaper deal, it is usually possible to jump ship to a new one until just before the new mortgage begins.
Don’t just stick with your current bank or building society, as they may not offer the cheapest rates at the time your loan ends.
Use an online tool such as This is Money and L&C’s mortgage finder to see the best rates you could get, and consider using a mortgage broker to help you find the right deal for your circumstances. Many are fee-free for the borrower and charge their fees to the lender you choose instead.
Homeowners may also consider whether to use savings to pay down some of their mortgage, and therefore reduce the monthly payments.
This could be particularly helpful if doing so would take you into a lower loan-to-value band – for example, taking your equity in your home from 10 per cent to 15 per cent – as this would open up better mortgage deals.
However, only do so if you don’t need the money as a rainy day fund or to pay down other more pressing debts.
Another way to lower your monthly bill is by lengthening the term when you come to remortgage.
However, while it will reduce each individual monthly payment, this will increase the amount you pay overall and is not to be taken lightly.
The mortgage term is the number of years someone agrees to repay their mortgage for. This used to commonly be 25 years but on new mortgages is now often 30 years or even longer.
By lengthening the term of a mortgage, a borrower spreads their repayments over a longer period of time and therefore reduces the monthly costs. However, this will mean interest racks up for longer and the total paid will increase – potentially by tens or even hundreds of thousands.
For example, someone with a £200,000 mortgage paying 4 per cent interest over 20 years would face monthly repayments of £1,212, paying a total of £290,769 over the lifespan of the mortgage.
Conversely, someone with a £200,000 mortgage paying the same interest rate over a 40-year term would face monthly repayments of £835.
However, they would pay £400,981 over the lifespan of the mortgage: £110,212 more than on a 20 year term.
While their interest rate would likely change during this time if they remortgaged or fell on to their lender’s standard variable rate, the principle remains the same.
Ideally, borrowers who lengthen their mortgage term would overpay their mortgage or shorten the term again further down the line to make up for it.
Another way some borrowers can reduce their monthly payments is to switch to an interest-only mortgage, though again, this comes with big risks and should normally be viewed as a temporary measure.
With an interest-only mortgage, borrowers will only pay the interest each month, with the loan amount remaining the same.
This differs from a repayment mortgage where they will pay back a part of the loan, as well as the interest, each month until they eventually pay off the mortgage.
With interest-only, the monthly payments will be lower – but at the end of the mortgage term, the full amount borrowed will need to be repaid in one lump sum. If the homeowner doesn’t have the means to do so, they will need to sell them home to pay back the bank.
However, it is possible, for example, to fix for two years on an interest-only deal, and then switch back to a repayment option.
Most mortgage deals allow borrowers to make overpayments of 10 per cent of the total mortgage amount each year without incurring penalty charges – so it would still be possible to pay off chunks of the mortgage on a voluntary basis.
Someone with a £200,000 mortgage being repaid over 25 years on a rate of 4 per cent will pay £1,055 a month. If they switched their mortgage to an entirely interest-only deal their monthly costs would fall to £666.
Borrowers seeking an interest-only mortgage for their own home are subject to much stricter lending criteria, so it will be worth speaking to a mortgage broker first.
Property finance specialist, Chris Sykes, says that selling the property should be a last resort.
‘Consider refinancing and extending the mortgage term or putting some of the mortgage on interest-only,’ says Sykes.
‘Alternatively, sell and move to a cheaper property with a lower mortgage. This is an extreme option, but if none of the other options are good for the long term, this is what you are left with.’
Will mortgage rates continue to fall?
Last week’s spike in the rate of inflation could put an end to the mortgage rate cuts borrowers have enjoyed in recent months.
Consumer Price Index inflation rose to 3.4 per cent in December, according to the latest figures from the Office For National Statistics, up from 3.2 per cent in November.
It is the first time CPI has risen since June, and leaves it well above the Bank of England’s 2 per cent target.
An interest rate cut next month by the Bank of England now looks unlikely with the base rate now set to stay at 3.75 per cent.
Darryl Dhoffer, founder at Bedford-based The Mortgage Geezer, said hopes of sub-3 per cent rates were all but dashed by the inflation reading last week.
‘The mechanism is brutal but simple: sticky inflation forces the Bank of England to keep the base rate higher for longer,’ he said.
‘Just as borrowers exhaled, hoping the worst was over, this reversal threatens a new cycle of pain.’
