The UK housing market is currently at a bit of a crossroads. For well over a decade the UK experienced extremely low-interest rate levels and we got used to 1% mortgage deals. With more global uncertainty comes inflation and that has seen interest rates rise, although rates of between 4-5% are still historically lower than you will have seen during the 1980s and 1990s. Many homeowners are coming off 1-2% deals either this year or next year are facing higher costs, while new buyers face higher rates in an already difficult market. If you are unsure what this means for your mortgage, as well as what can be done to help mitigate the effects, this guide aims to help.

We’ll discuss where rates may be heading, how they impact your mortgage, and how you can prepare for the future.

What’s Currently Happening with Interest Rates in the UK?

Over the last decade, the UK experienced very low mortgage rates where many people took fixed rate deals of 1-2%. These low rates were attributable to a prolonged policy of economic stimulus that included historically low base rates from the Bank of England.  The financial environment has changed remarkably in the past two years.

Why Are Interest Rates Rising?

Rising inflation has put pressure on the Bank of England to increase the base rate in a bid to control spending and restore order in the economy. The base rate is currently 4.5%, having dropped from a high of 5.25%, after years of standing at near zero. This means that those taking out a mortgage in the last few years have seen higher mortgage repayments rates.

Grange Mortgages and the Bigger Picture

Grange Mortgages advise on mortgage products across the whole of the UK mortgage market. The average two-year fixed-rate mortgage has risen from approximately 2% in 2021 to more than 6% in 2024, and many standard variable rates are even higher than this. As the Bank of England has gradually started to lower the base rate from 5.25% down to 4.5%, we are starting to see some slightly cheaper deals – some of which are down as low as 4% now.

For homeowners with a fixed-term agreement perhaps taken out 5 years ago, this means that they will have to pay more for their mortgage when their deal expires.

What Are the Implications for Homeowners?

If you are a homeowner with a fixed term mortgage at a low rate, then the increase in interest rates will have a major impact on your finances. Here are the most common challenges and what they mean:

Higher Monthly Payments 

A household paying £800 monthly on a 2% fixed rate could be paying up to £1,200 or even more at today’s rates. Even low increases in percentage points can add up to hundreds or even thousands of pounds over the year.

Loan Affordability Assessment 

When you are applying for new mortgage products, the lenders will re-evaluate your ability to afford the products based on your current earnings and debts. This may be affected by the increasing costs of living.

Key Actions for Those Coming Off Low-Rate Fixed Deals

1. Act Early—Do not wait until your deal ends

 If your fixed rate deal is up in the next six months, then you should start looking for solutions now. There are many lenders who allow you to fix your mortgage rate for up to six months before taking the loan, so you can fix your rate before the prices rise further.

2. Consider All Mortgage Options

There is no ‘one size fits all’ when it comes to refinancing your mortgage. Here are a few of the products you might explore:

Fixed-Rate Mortgages: 

If you want a fixed monthly payment, then you should go for a fixed rate deal so that no matter how much the interest rates increase you will not be paying more than what you had agreed to.

Tracker or Variable Mortgages: 

If you believe that rates will stay low or even fall soon, then a tracker or variable rate mortgage that follows the base rate or the lender’s benchmark rate may offer better initial rates. But be prepared to pay different amounts each month.

Offset Mortgages: 

These allow you to combine your savings and mortgage so that the interest is charged on the difference between the two. This is particularly advantageous for those with a large amount of savings as it can be a tax effective way of saving.

3. Use a Mortgage Broker

Mortgage brokers offer products that you may not find when you approach a lender directly. They can determine your situation and tell you how to reduce your costs as much as possible. Moreover, brokers are knowledgeable about the market and the trends that are most likely to affect it soon.

4. Assess Overpayments

If your current product allows it, consider paying more towards your mortgage. Overpayments reduce the amount of the loan that needs to be repaid, which may help to reduce the impact of higher interest rates when remortgaging.

5. Improve Your Credit Score

Due to the current trend of caution in lending, a good credit score is more crucial than ever. Pay your bills on time, do not apply for more credit when it is not necessary and check your credit report for any mistakes that you may have made.

6. Review Your Budget

Although you may have the best mortgage product in the market, higher rates will put a strain on your household budget. Revisit your spending and see where you can cut down on the discretionary spending and try to build an emergency fund.

What About First-Time Buyers?

For first time buyers, this means that more is at stake in the market that is experiencing rising interest rates, but it is not all negative news.

Challenges for First-Time Buyers

• Affordability Stress:  Higher interest rates mean that you will be paying more each month, which means that you can borrow less.
• Larger Deposits Required:  There are tighter criteria for lending, which may mean that first time buyers must put down larger deposits to obtain the best rates.

Opportunities for First-Time Buyers

• Slower Market Growth: This article explains that while many areas have seen house price declines, it is still feasible to get better deals than one could have gotten a year ago in certain markets.
• Shared Ownership Schemes: Schemes like shared ownership are still available to help people become homeowners with the option of putting down a lower initial deposit.

Tips for First-Time Buyers

• Get a Mortgage Agreement in Principle: This will help you know exactly how much you can spend, which will help you when you are set to make an offer.
• Explore Deals Targeted at First-Time Buyers: Some lenders have certain concessions like cash back or lower fees for first time home buyers.
• Consult Experts: A mortgage broker who knows what first time buyers need will be able to assist you in getting the best deal.

Looking Ahead—Where Might Interest Rates Be Heading?

Although nobody can guarantee the movement in interest rates, these factors play an important role in predicting interest rate movements, so it’s worth being aware of them.

• Inflation: The general rule is that if inflation is rising then interest rates will rise. If inflation is falling, there is more opportunity for interest rates to fall.
• Recession Concerns: The Bank of England may reduce its monetary policy due to a weak economy, which could lead to lower interest rates.

Protect Your Financial Future Today

It is important to know the current circumstances and what needs to be done to get through the current mortgage market challenges. Whether you are a homeowner with a low-interest rate agreement which is coming to an end, or a first-time buyer planning to enter the market, it is crucial to act wisely.

Begin preparing now by:

• Checking your financial status and credit reports.
• Searching for mortgage deals with the help of a reputable broker like Grange Mortgages.
• Keeping up with the changes in the housing market.

Although the future is unpredictable, there are certain measures that can be taken now that will help to secure the financial future of tomorrow. And don’t forget, you can secure a deal up to 6 months in advance of your existing deal coming to an end.

We’re available 7 days a week to ensure a smooth and simple process.