Elizabeth Buko has not yet been hit by an increase in rates, but she is very aware that this is coming. In the summer of 2021, the 36-year-old who lives in Hertfordshire locked in her mortgage at 1.25 per cent for five years with her husband. They pay £1,100 a month.
“A couple of months later, rates started shooting up,” said Buko, who is a financial coach and runs her own company, Wealth From Little.
Assuming mortgage rates are 4 per cent by the time she remortgages in three years’ time, her monthly sum will increase £500, to around £1,600.
Thousands of mortgage holders are in the same position. More than four fifths of mortgages are now on fixed rates, so will be affected only when their deal is up.
Those who secured a five-year deal in 2021 (the most popular type of loan back then, when mortgages as low as 0.99 per cent were on offer), are likely to be the last major cohort affected by increased rates when they come to remortgage in 2026. Many of these people were on rock bottom deals; they will be remortgaging on to rates that are three or four times what they are currently paying.
Rather than passively wait for this time to come, the more sensible is this group are putting in place a mitigation plan for when it does happen.
Like Buko and her husband. They have decided to ditch plans for an extension and renovation and are instead overpaying on their mortgage by about £900 a month. This way they can reduce the size of their loan, so when they do remortgage, there’s less to pay interest on.
In its latest monetary report, the Bank of England said that 50 per cent of mortgage holders were yet to reach the end of their fixed-rate loan – and were therefore yet to feel a direct rate rise – had already spent less as a result of rising mortgage rates. Here are some of the ways people you can get ahead of the rate rises if you haven’t been affected already.
To overpay or to save?
There are two options available: overpaying your mortgage, or putting spare cash in a savings account so when you remortgage you can use some of that cash to afford the higher bill.
Overpaying lowers your loan size, meaning the total you pay interest on will be less. Overpaying could also lower your loan-to-value (your mortgage size versus the equity you own), meaning a cheaper mortgage deal.
Say you have a mortgage worth £200,000, and you are two years into a five-year mortgage deal at 1 per cent. You would currently pay £754 a month.
When your deal comes to an end in three years time, mortgage rates are expected to be around 4 per cent. Your loan value would have dropped to £163,895, and you would pay £993 a month.
According to calculations by L&C Mortgages, if you overpaid your mortgage by £100 a month for the remainder of your deal, your new monthly payments would cost £971 – £23 cheaper than if you did nothing.
If you overpaid by £500 a month over the next three years, your new monthly payments would be £882 (more than £100 less a month) and if you overpaid by £1,000 a month, your new monthly payments would drop to £772. The calculations assume you then pay 4 per cent interest for the rest of a 20-year mortgage term.
“Overpayments will eat into your mortgage amount more rapidly,” said David Hollingworth from L&C Mortgages. “That will leave a smaller mortgage to deal with when the rate expires and reduce your overall interest bill.
“It would also help you adjust to the fact that you are likely to need to allocate more of your monthly budget to your mortgage in this higher-rate environment.”
If overpaying your mortgage is a habit that you can keep up throughout your mortgage term, then the savings can be even bigger.
If you paid 4 per cent on a £200,000 mortgage over 20 years, your total interest bill would be £116,701.
If you overpaid by £100 a month, you would repay the mortgage three years and four months early, and save £18,000 in interest payments, according to L&C. If you overpaid by £300 a month, you would save nearly £50,000 in interest and repay your mortgage nearly eight years early.
“Overpaying your mortgage is always a good idea, and the interest saved over the lifetime of the mortgage can add up to an eye-watering sum,” said Scott Taylor-Barr, a financial adviser at Barnsdale Financial Management.
“Ideally, if you are on an ultra-low rate, it would be great if you could increase your monthly payments to the level you can expect once that deal ends. This would maximise the benefit the low rate gives you now, and prepare you for what your outgoings will be in the near future.”
What to think about
If you decide to overpay on your mortgage, check your lender’s rules on early repayment charges.
Most deals will have a charge during the fixed period if you want to repay early, but lenders typically allow you to pay off 10 per cent of the mortgage each year – sometimes this is above and beyond your typical mortgage payments, sometimes it includes them.
Check with your lender as some have different rules. For example, Natwest allows you to pay 20 per cent of the balance each year with no early repayment charge.
It’s also important to keep some cash that is easily accessed for a rainy day fund. Once you have paid the money to your lender, it is unlikely that you will be able to get it back, so only overpay any sum of money that you can definitely afford.
Save cash then use that to help with higher mortgage bills
This is another way to ease the pain. The average easy-access savings account now pays about 3.2 per cent, and if you lock your money away for a year, you could get nearly 6 per cent.
With rates so high, it could be worth putting any extra cash into savings instead of overpaying your mortgage. This would also keep your cash more free than paying into your mortgage. Finding out which is best in pounds and pence terms isn’t simple, as it depends on the length of your mortgage term and future interest rates. However, you can look at it roughly over a short-term basis.
According to L&C’s calculations, if you paid an extra £100 a month for three years you would then save £23 a month on your future mortgage payments. Over a year, that adds up to £276.
If you instead paid £100 a month into a savings account that paid 3.2 per cent over three years, you would make around £180 in interest payments. If you took the whole lump sum of £3,600 (£100 a month over three years) and saved in a one-year bond paying 5.91 per cent, you would get £212.
In reality, you should think about what gives you more peace of mind: paying down your mortgage debt, or keeping your savings easily accessible.
And in the middle of a cost of living crisis, finding the extra money could be a challenge. To overpay on their mortgage, for example, Buko’s family had to make some changes.
Before, Buko’s family would live solely off her husband’s income, and Buko’s earnings would go towards savings for the family – their pensions, Isas, emergency funds and savings for the children.
Now, however, some of Buko’s earnings are being funnelled towards the extra mortgage payments. On top of this, while treats such as taking the children to the cinema or bowling would have come out of her husband’s income, she now pays for this out of her own, as the day-to-day bills eat up more of her husband’s salary.
“The sacrifices now are worth it for the long-term,” said Buko. “It’s about knowing that there is a possibility that the future could be more expensive, so making the plan now. What do I need to do, so that the future won’t be so bad in the worst-case scenario?”
