The highlight (or low light) from the UK’s most recent mini-budget was the announcement of huge tax cuts. As a result, interest rates have risen, while the pound has plummeted to record lows against the dollar. While the government has since taken a U-turn on this monumental decision, the mortgage market remains quite volatile.
With the rise in interest rates, mortgage lenders are faced with the challenge of providing products that are both profitable and realistic for borrowers. The Guardian (link: https://www.theguardian.com/money/2022/sep/27/uk-mortgage-deals-pulled-pound-rate-rise) reports that some of the country’s most prominent lenders have withdrawn mortgage deals and removed mortgage products from their offering.
The current volatility in the space highlights the need for would-be borrowers to consult with independent advisors in order to secure the right option under these circumstances. But in the meanwhile, let’s take a look at what this situation means for your mortgage deal.
The type of mortgage deal you’re on
The extent to which the mortgage turmoil affects you is largely determined by the type of deal you’re on. Fixed-rate mortgages, the most popular option, remain unaffected for now. The interest rate agreed upon from the outset applies throughout the product period agreed.
Should you not need a new deal, or need to make any changes to your mortgage, you’re good. However, be prepared for significantly higher interest rates should you need to find a new deal.
Borrowers with variable-rate mortgages, on the other hand, will feel the blow. With the interest rate here directly linked to the Bank base rate, or the lender’s standard variable rate, a variable rate mortgage fluctuates month-to-month.
At the outset this seems like the more cost-effective (and therefore attractive) option, as the initial interest rate tends to be lower than the fixed rate. But the fickle nature of the markets makes it a very risky option, compounding the challenge of efficiently managing monthly household expenses.
How will this affect first-time buyers?
For one, first-time buyers should take heed of this crisis when evaluating what type of mortgage deal they sign up for. That said, unfortunately, the interest rate hike creates a further barrier to entry for would-be first-time buyers. Both budgets and expectations need to be lowered in order to account for the additional pounds on repayments.
There’s no way to sugar-coat it; for now, the outlook is pretty bleak, but your best chance at making the most out of a bad situation is to consult with an independent mortgage advisor. You’re in better hands with someone who understands and can navigate these changes, while considering your unique profile and needs.