Navigating mortgages

What is an offset mortgage?
  • Financial planning
  • 4 minute read

The UK housing and mortgage market have been on quite a journey over the last few years. Covid-19 resulted in the average UK property price rising 20% from £219,583 to £273,751¹. This was fuelled by the ultra-low interest rates, the government’s Stamp Duty Land Tax incentive scheme, and a desire from workers to improve their work-life balance and to take advantage of hybrid and home-based working arrangements.

Fast forward to the present day and we find a very different set of circumstances. Inflationary pressures and rising interest rates are taking their toll on the sector, with activity in the housing market slowing and property values actually decreasing on a month-on-month basis for the first time since March 2020. The overriding concern for homeowners at all stages of the mortgage lifecycle is the impact of rising interest rates and other spiralling costs on their budget.

The questions echoing around at present are ‘how high can rates go?’ and ‘what are my mortgage payments going to look like when my fixed rate ends?’ however, questions such as these are impossible to answer without a crystal ball.

What can mortgage borrowers do to weather the storm?

Lump sum overpayments

Monthly mortgage repayments are made up of three interrelated factors; the amount of borrowing, the full term of the mortgage, and the interest rate being applied. Most borrowers have capital and interest repayment mortgages for which the level of borrowing reduces with each monthly mortgage repayment. For those with the means to do so, it may be worth considering the impact of making a lump sum overpayment to the mortgage, please check whether making an overpayment on your mortgage incurs a penalty.

Monthly overpayments

Borrowers who fixed their rate prior to the increases may want to consider making regular overpayments to their mortgage if their monthly budget allows. This will have the double benefit of helping to acclimatise to the increased monthly payments that are inevitably coming down the line, whilst also reducing their underlying borrowing faster and ultimately saving interest in the long run. Please always check with your mortgage provider whether overpayments incur a penalty.

Extending your mortgage term

Those without the means to overpay their mortgage might benefit from considering whether to extend their repayment term. There used to be a time when 25 years was considered the standard mortgage term. However, the combination of higher house prices and delayed retirement ages has resulted in many borrowers opting for longer mortgage terms when buying their home.

A longer mortgage term has the benefit of reduced monthly repayments because the original capital sum is being spread over a longer period of time. The potential for increased borrowing often appears attractive to those homeowners looking to maximise their borrowing potential, however there is a significant downside to these longer-term mortgages – they will be a lot more expensive in real terms. This is because the interest continues to be charged over a longer period and the total cost of an extended mortgage term can be considerable.

Shop for the best mortgage rate

Given the pressures that monthly household budgets are under at present, shopping around for the best mortgage rate becomes ever more important. Many existing or prospective borrowers find it tempting to stay with what is familiar, ie their existing lender or bank. This might prove to be an expensive decision – for example, at the time of writing the best two-year fixed rate at 60% loan-to-value is 5.62%, however there are some lenders offering equivalent rates as high as 6.79%. For first time buyers and existing borrowers alike, it is really important to be aware of your loan-to-value (LTV) ratio. LTV is expressed as a percentage, and is calculated by dividing the amount of borrowing against the value of the property. For example, if a property was worth £400,000 and the borrowing was £300,000 then the LTV would be 75%.

Lenders typically set their interest rates based on LTV bandings ranging from 60% up to 95%. The lowest interest rates are available to borrowers with a lower LTV ratio. This means that a borrower arranging a mortgage with 69.9% borrowing is likely to get a lower interest rate (all else being equal) than a borrower arranging an equivalent mortgage with 70.1% borrowing. A small overpayment at this time could therefore open up a much more attractive set of mortgage interest rates.

Speaking to a mortgage broker who is completely independent of mortgage lenders and who can undertake a comprehensive review of the market, or completing research via an online comparison tool is therefore a vital step when exploring mortgage options, especially in these challenging and volatile times.

Mortgages and retirement

What options are available for borrowers who are close to retirement? The good news is that there have been many forward strides within this sector in recent years, with product ranges growing in both variety and flexibility, however they are typically more expensive than conventional mortgages. When it comes to interest rates, there are a few options available when choosing a mortgage rate. There are fixed rates which are typically available for periods of 2-10 years, and there are variable rates, which might be set by the lender or be linked to an external source such as the Bank of England base rate. These different types of interest rates all have their own pricing, and as such choosing between these will influence the level of a monthly payment.

Contact us

Our team of mortgage advisers are able to navigate you through these times of uncertainty and help with your mortgage, ensuring it fits with your financial goals.

Predicting what will happen in the future to mortgage rates, house prices and borrowing is a complete unknown, however by considering these steps, this will help you plan for the future. 
Your home may be repossessed if you do not keep up with your repayments on your mortgage.

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