Will mortgage rates keep rising and should I remortgage now?

Mortgage rates rose for the 11th month in a row in September and the level of choice fell as the market adjusts to higher interest rates.

The average cost of a two-year fixed rate mortgage reached a nine-and-a-half-year high of 4.24% in September, an increase of 1.9% since December last year.

The typical cost of a five-year fixed rate mortgage also rose to 4.33%, 1.69% more than in December and the highest level since November 2012, according to financial information group Moneyfacts.

Meanwhile, lenders have withdrawn more than 500 mortgage products during the past month, leaving 3,890 different deals for borrowers to choose from, the lowest level since April 2021 and down from more than 5,300 deals at the beginning of December.

The number of different mortgages available fell for all types of borrower, ranging from first-time buyers to those with large equity stakes in their property.

But there was some good news for potential borrowers, with the average amount of time a mortgage is available for before lenders withdraw it increasing from a record low of 17 days in August to 28 days this month.

Why is this happening?

The rise in mortgage rates reflects increases to the Bank of England base rate.

The Bank’s Monetary Policy Committee has hiked the base rate by 1.65% since December last year, as it tries to control inflation.

These increases make it more expensive for lenders to borrow money on the money markets, which is reflected in higher mortgage rates for customers.

Should I still remortgage?

Despite the increase in mortgage rates seen since December last year, it is still definitely worth remortgaging if you are coming to the end of your current deal.

The average standard variable rate – the rate that lenders put you on if you do not remortgage – is currently 5.4%, the highest level since December 2008.

The rate has now increased for nine months in a row, rising by 0.23% in August, the biggest monthly jump since Moneyfacts first started keeping records in December 2007.

And it is expected to continue rising, as standard variable rates typically move up and down in line with changes to the base rate.

Although interest on the average two-year fixed rate mortgage has now reached 4.24%, homeowners with a £200,000 mortgage could still save £136 a month by remortgaging, rather than sitting on their lender’s standard variable rate, even before future interest rate rises are factored in.

Will interest rates rise further?

The short answer is yes. But it is more difficult to predict exactly how much further they will increase by.

The Bank of England is currently increasing interest rates in a bid to bring down inflation.

Economists had previously predicted that inflation would not peak until early 2023, with some predicting it could get as high as 22%.

But following Prime Minister Liz Truss’ energy price freeze announcement, inflation is now expected to peak earlier in November this year and at a lower level of around 11%.

That said, by putting more money back into consumers’ pockets, economists think the energy price freeze will lead to inflation remaining elevated for longer.

As a result, interest rates are also likely to have to remain higher for longer.

Overall, economists are predicting the Bank of England will have to increase the base rate to between 3% and 4% by the middle of next year to get inflation back under control.

That would mean interest rates increasing by between 1.25% and 2.25% from their current level.

Which mortgages are best value?

Deciding what type of mortgage to opt for will depend a lot on your personal circumstances.

At an average of 4.24%, two-year fixed rate mortgages currently look expensive compared with five-year fixed rate ones which average 4.33%.

The premium borrowers have to pay for the security of fixing for five years has been narrowing since December and now stands at just 0.9%.

Meanwhile, the typical interest rate charged on a 10-year fixed rate mortgage is the same as that for a five-year one at 4.33%.

But before opting for a longer-term fixed it is important to remember that what looks like a competitive mortgage rate now, may not look such good value in three or four-years’ time.

The current level of global uncertainty makes it difficult to judge how long interest rates will need to remain high for, but with the UK expected to go into recession, they are not expected to remain high for too long.

It is also important to think about your own personal circumstances, as if you need to exit a five or 10-year fixed rate mortgage early, you are likely to have to pay an early redemption penalty.

These vary according to how long you have left on your mortgage deal. For example, if you have three years left on a five-year fixed rate mortgage, you may have to pay a fee equivalent to 3% of your outstanding mortgage debt.

What about tracker mortgages?

The average rate on a tracker mortgage is currently much lower than that on fixed rate ones, with interest on a two-year deal averaging 3.33%.

But while this may look good value compared with fixed rate mortgages, remember that while the interest you are charged on a fixed rate deal stays the same for the product term, the rate on a tracker one moves up and down in line with changes to the base rate.

As a result, if the base rate increases to 3%, the rate on a two-year tracker mortgage would increase to 4.58%, while if the base rate goes up to 4%, the tracker rate would rise to 5.58%.

How much will my mortgage repayments increase by?

If you are coming to the end of a two-year fixed rate mortgage, the cost of another two-year fixed rate deal is likely to be around 2% higher than when you last remortgaged.

The average interest rate charged on a two-year fixed rate mortgage was 2.24% in September 2020, compared with 4.24% now.

This means someone with a £200,000 mortgage being repaid over 25 years, will see their monthly repayments increase by just over £200 a month.

Of course, if you have a smaller mortgage, the impact will be less, with repayments on a £100,000 loan increasing by around £100 a month in the example above.

What should I do if my mortgage deal still has a few months left?

Deciding what you should do is a bit tricker if your mortgage deal still has a few months left to run.

The first thing you need to do is find out if you would have to pay any fees for exiting you current product early.

If you do and these are high, you may be better off staying where you are.

Next, take a look at what your monthly repayments are now, and what they would be if you remortgaged to one of the products that is available today.

If you are on a very competitive rate, it might work out cheaper for you to stay where you are until the deal ends before remortgaging, even if interest rates have increased by then.

For example, let’s say you currently have seven months left on a two-year fix for a £200,000 mortgage at a rate of 1.5%. Your currently monthly repayments would be £800 a month or £5,600 over seven months.

If you remortgaged to the average two-year fixed rate of 4.24%, your monthly repayments would be £1,095 a month or £7,665 over seven months.

You can ‘book’ a new mortgage deal between three and six months before your current one ends.

As a result, interest rates may only have increased by 0.5% or 0.75% before you are able to secure a new deal.

If interest rates rose by 0.5%, and this was passed on by lenders, your repayments would be £56 a month more than if you remortgaged now.

Under this scenario, you would save £2,065 by delaying remortgaging for seven months, while you would pay a total of £1,344 more in repayments over a two-year mortgage term if interest rates had risen by a further 0.5% by the time you remortgaged, meaning you would be better off delaying.

If interest rates had risen by 0.75% before you remortgaged, it would cost you an additional £86 a month or £2,064 in repayments over two years, meaning you would be in broadly the same position as if you had remortgaged before your term ended, assuming you did not incur any early exist penalties.

Unfortunately, no-one knows exactly what will happen to interest rates in the months ahead, and deciding whether or not to remortgage early will depend on the rate you are paying now.

If you are unsure about what you should do, it may be worth seeking the advice of a mortgage broker.