There’s a bigger, looming problem for homeowners nearing the end of their fixed income deals. Pantheon expects the average homeowner who refinances this winter will see a four percentage point increase in their mortgage rates.
Next year the blow will be even bigger. According to UK Finance, the lender, 1.8 million homeowners will have to refinance by 2023. Half a million comes at the end of the two-year fixes, meaning they took out loans when it was possible to get less than 1 PC mortgage deals. They will have to refinance at rates potentially eight times higher.
How much can I borrow?
A large proportion of homeowners looking to re-mortgage next year won’t be able to because they won’t pass lenders’ affordability tests now.
This means they won’t have access to the best rates, and many will be forced to use product transfer rates, which are typically a percentage point higher than the market rate.
“Probably more people than ever will stick with their existing lender and use product transfer rates,” said Mr. Strutt.
New buyers will find that the maximum amount they can borrow will plummet. This is because the expectation of rising interest rates will reduce the size of mortgages banks can lend, based on affordability stress testing requirements.
Mr Wishart said that the expectation of bank interest rates to rise to 6 pc would cause the maximum income multiple offered by banks to fall from 4.7 in August to 3.7 within a few months.
This would mean that a joint-income household with a combined salary of £90,000 would see the amount they can borrow from £423,000 to £333,000 – a drop of £90,000, or 21 percent.
How can I protect myself against rising rates?
There are two main ways homeowners can protect themselves from rising mortgage costs.
First, they can try to fix their rates. Many lenders offer a mortgage that can be held for six months, and some even nine months, meaning borrowers can lock in an interest rate six months before they need the loan.
As banks expect bank rates to fall after peaking in 2023, the rates on some long-term fixed-income deals appear competitively priced in the current market.
For example, Barclays offers a seven-year deal with a fixed interest rate of 3.49 pc. with a fee of £990, for buyers with a 40 pc deposit. However, this means that borrowers could miss out on cheap rates if and when rates eventually fall.
Homeowners can also lower their bills by paying off some of their mortgage early – although this is only an option for those with cash to spare.
However, borrowers sometimes have access to significantly better rates, even if they slightly increase their equity. In July, for example, a buyer or homeowner with 10 percent equity could access a rate that was 0.3 percentage points cheaper than a buyer with just 5 percent, Pantheon said.
Click here to learn more about what you can do to reduce your costs.