Rate of return: How rising mortgage costs are impacting borrowers

The learning objectives for this article are to:

The cost of living has put significant financial strain on many households. For prospective buyers or homeowners due to remortgage there is the added concern of rising mortgage rates.

Indeed, in the current environment of high interest rates and inflation, homebuyers and homeowners will be considering what their monthly mortgage costs could be and how they can afford to pay them. The Bank of England’s base rate currently stands at 4% - a stark difference compared to little over a year ago. Inflation also remains at a 40-year high, with the latest figures standing at 10.5%. However, Bank of England predictions suggest that inflation will fall to 4% later in 2023, and fixed rates are also already starting to come down.

While these signs of recovery are positive for the market overall, they will offer less comfort to the millions of households due to renew their mortgage deal in the coming months. ONS statistics suggest 1.4 million households in the UK are due to renew their fixed rate mortgages this year . Our own research at TML found that half of those on a fixed, tracked or discount mortgage are due to have their deal up for renewal in the next two years. 25% of those who are expecting their mortgage costs to go up believe it will increase by an average extra cost of £441 a month. Households will therefore be keeping their eyes out for what their new mortgage deal could be.

Over the last year, mortgage rates have been steadily increasing in line with the Bank of England’s base rate and subsequently many homeowners and buyers will be looking at higher mortgage deals than previously used to. While some rates are beginning to come down, they remain significantly higher than many borrowers are used to. Faced with the prospect of higher monthly payments many have started to consider their options, whether that’s paying an early repayment charge to try and lock in a fixed rate, taking on extra work, or downsizing.

Not only are borrowers facing a very different mortgage market than when they previously fixed their deal, they could also be approaching their new deal with a very different set of financial circumstances. The Covid-19 pandemic caused significant financial strain for many individuals and business owners, and the cost-of-living crisis is exacerbating the pressures felt over the past two years. This is likely to, and we’re already starting to see it mean, more missed payments, unsecured debts and lower credit ratings. Indeed, TML’s research found that one in ten people had missed an energy bill payment in 2022. Therefore, not only is it harder to access a favourable rate, but many will also no longer qualify for the deals they were on previously.

While affordability is likely to continue to be a key issue within the market, brokers can play a vital role to help borrowers navigate the market and find the best options for them at a time of such financial strain.

What are homeowners doing to manage rising mortgage costs?

The good news is that borrowers are already looking to brokers for guidance. 13% say they have already spoken to a mortgage broker to find the best possible deal, while 27% said they will be doing this, and 25% say they are considering it.

After this period of uncertainty borrowers could be looking for greater flexibility and therefore may want to speak to their broker about variable products over fixed. A broker will be able to advise what is best depending on individual circumstances.

Others are considering alternative routes. 45% of borrowers have revealed that they either have or are considering paying an early repayment charge on their mortgage deal in or to fix to a reduced rate. This short-term decision for security could mean many will be attached to a higher rate than they may have otherwise secured further down the line.

Homeowners are also considering taking on lodgers to bring in additional funds (16%). However, while lodgers may provide some immediate cost relief, important legal considerations need to be factored in before becoming a resident landlord. For example, mortgage borrowers may need to check with their lenders, and it could impact other benefits and tax credits.

Some are even considering their homeownership status completely. Indeed 24% have said they either will be or are contemplating selling completely and going back to renting for the time being, sheltering them from increasing costs. 10% admitted they will be downsizing to reduce their monthly expenditure, with 20% considering it.

For homeowners concerned about affording their repayments speak to your lender early about forbearance options. This could include switching to an interest only payment plan.

The role of the broker

Now more than ever, brokers play a pivotal role in supporting consumers make one of the biggest financial decisions in their lives and can help navigate the market to find the best possible deals that suit individual circumstances and factor in true costs.

Additionally, for first-time buyers looking to the best rates, the outlook continues to be complex. Rising mortgage rates and high living costs could arguably cause house prices to go down over the next year. But while this should present opportunity to set foot on the ladder, high mortgage costs present a somewhat distorted picture. Brokers are situated in a unique position to help these individuals at an important juncture in their life and provide the appropriate support in achieving home ownership in a way that works for them.

There are lenders in the market with the expertise and willingness to support borrowers with complex incomes or adverse credit where they may struggle to access finance on the high street. As borrowers seek out the best deal for them, brokers who are able to guide them to the right lender for their circumstances will be truly valuable.