Cheapest Mortgage Rates More Than Double: Should You Overpay?
The cheapest fixed mortgage rates have more than doubled since October of last year, according to an analysis by mortgage broker L&C Mortgages.
The typical new £150,000 repayment mortgage now costs more than £100 a month more than it did seven months ago, an increase of more than £1,200 a year.
The analysis focused on the cheapest two-year and five-year fixed offers offered by the top 10 lenders.
Mortgage rates skyrocket: Those looking for a mortgage offer today will find they are paying considerably more than those who did in October
The cheapest two-year and five-year average fixed rates are now well above 2 percent at 2.36 percent and 2.46 percent respectively, after rising from record lows of 0.89 percent and 1 .05 percent respectively in last October.
For someone paying a £150,000 mortgage over 25 years, the cheapest typical two-year fix now costs £662 a month compared with £558 a month in October, according to L&C.
The base rate increase has pushed up the cost of mortgages since it first rose in late 2021. It has gone from 0.1 percent in December 2021 to 1 percent today.
Rapid base rate increases have also been reflected in lenders’ standard variable rates. These are the highest variable rates that borrowers fall into once their initial deal is up.
The average standard variable rate among the top 10 lenders rose from 3.82 percent in October to 4.34 percent as of this month.
On a typical £150,000 down payment mortgage with a 25-year term, that’s the difference between paying £777 per month and £820 per month.
|type of mortgage||Average rate Oct 2021||Average rate May 2022|
|two year fixed rate||0.89%||2.36%|
|Five-year fixed rate||1.05%||2.46%|
|Standard variable rate||3.82%||4.34%|
David Hollingworth, Associate Director of L&C Mortgages, said: “The market is moving at breakneck speed as lenders try to manage their product ranges and loan volumes, often resulting in products that last for days rather than weeks”.
“That presents a real challenge for borrowers trying to stay on top of market movements, but with mortgage rates continuing to rise, it’s even more important for borrowers to keep a tight rein on their mortgage.”
Should I overpay to avoid future increases?
Mortgage rates are expected to continue to rise throughout the year. Some economists warn that the base rate could exceed 2 percent by the end of 2022.
Nearly £5.1bn was overpaid on home loans in the first three months of this year, according to Bank of England research, with Santander claiming it had seen a 20 per cent rise in overpayments compared to the beginning of last year.
L&C looked at the cheapest two-year and five-year mortgage offers from the top 10 lenders covering 60 percent of a property’s value, between March 2021 and now
For those worried about the prospect of facing higher rates when they remortgage, overpaying to pay off their mortgage faster could be a solution, though only if they have the means to do so.
Most fixed-rate mortgage offers allow borrowers to overpay up to 10 percent of the total outstanding amount each year without incurring prepayment fees. Some are more flexible, while others can be more restrictive.
Alex Winn, a Habito mortgage broker, said: ‘The main reason to pay off some or all of your mortgage early is that it can save you a lot of money.
‘This is because interest rates on mortgages tend to be much higher than interest rates on savings.
‘If you have an amount of money saved in a savings account, you will earn less interest than you are paying on your mortgage.
‘If you can save the cash and pay that amount of your mortgage, you’ll be better off in the long run.
‘Paying off your mortgage ahead of time also gives you freedom and security.’
However, with high inflation and a cost of living crisis, there are reasons why paying off your mortgage early might not be the smartest choice.
How much can you save by paying more?
Alex Winn, Mortgage Broker at Habito gave the following example:
If you had an outstanding mortgage debt of £100,000 due over the next 20 years at an interest rate of 3 per cent, your monthly payments would be £474.
If you decided to add an extra £100 to that each month (£574 in total), you could pay off your mortgage five years and 11 months early, saving £10,805 on interest alone.
Using the same mortgage, but paying a one-off £10,000 (10 per cent of the balance), you could pay off your mortgage three years and six months earlier, saving £10,023 in interest payments.
For starters, you need to make sure you have enough cash in reserve.
“If you’re going to use your savings to pay off your mortgage early, make sure you don’t drain your account and come up short,” says Winn.
‘Keep enough in reserve to cover three to six months of living expenses, plus a little more for the unexpected.’
It would also be wise to pay off the most expensive debts first, since mortgage interest rates are often lower than other types of loans.
“If you have credit card debt, an overdraft, or unsecured personal loans, prioritize paying these off first,” Winn adds.
“Otherwise, you could end up paying a lot more in interest than you would save by paying your mortgage.”
Cost reduction: Overpaying a mortgage can help homeowners get out of debt faster, lowering the interest they pay overall.
It’s also important to avoid paying too much and receiving early repayment fees, as this can make the whole cost-saving exercise pointless.
Early repayment fees typically range from 1 percent to 5 percent of the total mortgage amount.
The amount you’ll have to pay generally gets smaller the closer you get to the end of your current contract.
‘Make sure you pick the right time,’ says Winn, ‘it’s always best to re-mortgage when you’re nearing the end of your current fixed-rate mortgage agreement. That way, you’ll avoid early repayment charges.’
“That said, there are times when an early repayment fee is worth paying, such as when the amount you’ll save is greater than the cost of the fee.”
What about a shorter term or offset mortgage?
Shortening the mortgage term is another option for homeowners. This is the number of years you agree to pay off your mortgage, usually 25 years.
By shortening the term of a mortgage, the borrower spreads their payments over a shorter period of time and increases monthly costs.
This means there is less time for interest to accumulate and the amount you pay will generally be reduced.
For example, someone with a £200,000 mortgage paying the same interest rate over a 40-year term would face monthly payments of £660. However, they would pay £316,647 over the life of the mortgage.
Someone with a £200,000 mortgage paying 2.5 per cent interest over 20 years would face monthly payments of £1,060, paying a total of £254,379 over the life of the mortgage. This would save the borrower £62,268.
Switching to an offset mortgage could be another option for homeowners. This is a mortgage that is linked to a savings account with the same provider.
As you top up your savings account, your mortgage balance is reduced by the same amount.
For example, if you have £10,000 in your savings account and £100,000 left over to pay off your mortgage, with a mortgage offset, you only need to pay interest on £90,000.
With lower interest payments, you could afford to put more into your savings, and this money will ultimately help pay off your mortgage balance.
The best mortgage rates and how to find them
Finding a mortgage can seem confusing due to the wide variety of deals on offer.
This is Money has partnered with independent mortgage broker L&C, free of charge, to help you find the right home loan.
Our mortgage calculator can allow you to filter offers to see which ones fit your home value and deposit level.
You can also compare different fixed-rate mortgage durations, from two-year fixes to five-year fixes and even ten-year fixes, with monthly and total costs displayed.
Use the tool at the link below to compare the best deals, taking into account both fees and rates.
Some links in this article may be affiliate links. If you click on them, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.