Here are your options for remortgaging as interest rates rise - Sarah Coles

The Bank of England set the cat among the pigeons in towards the end of May, with the announcement that once you strip energy and food prices out of the figures, core inflation actually rose in April. This massively increased expectations that the Bank of England would need to hike rates more than the market had previously expected.

Until that point, the consensus was that rates would peak at 4.5%, but since then it has been expecting rates to go as high as 5.5%. As a result, we saw 15% of the mortgage market withdrawn by 5 June, according to Moneyfacts, and 75% of the biggest mortgage lenders had already hiked their rates. The repricing is likely to continue, as lenders run out of capacity at their current rate and need to exchange their variable rate for a fixed one. Higher rate expectations mean they’ll pay more for their fixed rate, which then gets passed straight on to borrowers.

If you need to remortgage while rates are higher, this could cause all kinds of problems. More than three million people have been shielded from the horror of 12 rate hikes so far by a fixed mortgage, but when their deal runs out, they face the full force of the rises in one single hit. The ONS calculated that 640,000 fixed deals would come to an end in the last six months of 2023, most of which were under 2%. A move to a 5.75% mortgage could be deadly. According to the Resolution Foundation, anyone whose deal comes to an end this year is set to see their monthly payments increase by an average of £192. HL research shows that this would cause financial problems for almost two thirds of people. Anyone with a large mortgage – including younger buyers – will be hit particularly hard.

If you’re set to remortgage in the immediate future, you have some options. If you’re concerned about locking in a higher fixed rate, you could opt for a variable rate. This has the advantage that when rates start to drop, your rate will fall back. However, it comes with risks. It’s likely to be cheaper in the short term, but a handful of rate rises could well push it above today’s fixed rates. You then have no guarantees about how far or how fast it could fall, so you could end up paying more for longer. You’ll need to weigh up the value of certainty against the possibility that if rates fall quickly enough, you could pay less overall.

If you decide to opt for a fixed rate, you need to weigh up the relative attractions of a five-year and two-year deal. A longer fix comes at a lower rate at the moment. However, the longer you fix for, the higher the chance that rates fall back – leaving your fixed rate mortgage looking comparatively expensive.

Whichever option you pick, it’s essential to shop around, rather than just going to your existing lender. They’re all looking for borrowers with slightly different risk profiles, and if you can find one that’s looking for you, you’ll get a much cheaper deal. You can do the legwork yourself, or opt for a broker. They will come with a cost, but they can often save you enough money to make it worthwhile.

For some people, this won’t be enough to make a mortgage affordable, so they need to consider more significant steps. Fortunately the Financial Conduct Authority spotted that people were likely to run into trouble with rising mortgage rates, so has updated its guidance to make these things more straightforward.

One option is to extend your mortgage period. By stretching a 20-year term to a 25-year one you may be able to bring down your payments to something more manageable. In most cases, your mortgage lender will let you do this without going through a formal affordability assessment – as long as it doesn’t take you beyond retirement age.

This comes with a cost, however. You’ll be paying the interest for a longer period, so the total cost of the mortgage will be higher. You also need to think about the impact this will have on your outgoings later in life, especially if you had expected to prioritise your pension once the mortgage was paid off.

This isn’t an option for everyone, so you could also consider talking to your lender about switching to an interest only mortgage for a period. If you’re only doing this for a limited time, your lender may not require you to go through a formal switching process. However, if you need to do it for longer, they will go into detail about affordability and how you will be able to afford to pay off the capital at the end of the deal. If you don’t have investments in place, they may refuse to allow the change.

For first time buyers, this will give them pause for thought. Some may be priced out of the property they want. They may fail the affordability test now that rates are higher, or they may simply decide that it’s too far for them to stretch their income. This is a sensible time to regroup and consider your options. Some people may decide to wait for mortgage deals to get cheaper. This is a risk because they don’t know how long this will take and whether the cost of the property will rise or fall in the interim. They’re also likely to pay increasingly expensive rent while they wait. Others will decide to opt for a cheaper home, so they have certainty they’ll be able to make a start in a home of their own sooner rather than later. There’s no way of knowing what the right option is, so consider which one you’ll be prepared to live with – even if it turns out to be the wrong call.

It's worth bearing in mind that there is still hope. If we get announcements in the coming weeks that inflation is weakening or the economy is struggling, then the market may be less convinced that quite so many hikes are on the way, which could bring mortgage rates back down a little. However, if we get more signs that inflation is here for the foreseeable future, they may remain stubbornly high.

Even if rates do pull back slightly, we’re unlikely to get big falls until the market starts to expect an imminent Bank of England cut. At the moment, that’s not on the cards until 2024, and even then, they’re expected to come down far more slowly than they increased. This level of uncertainty means it makes sense to base your decision on what makes sense for you – rather than trying to second-guess the market.

Check your contributions

Our research shows that just over one-fifth (21%) of people don’t know how much they or their employer are contributing to their pension – which rises to 28% among women.

Knowing how much is going in is the only way to know if you’re on track with your retirement savings, so if you lose track, it’s always worth revisiting it when you get a pay rise, or a new job. You can put some of the extra cash into a pension, before you get used to spending it, so you could make a big difference to your future, without feeling you’re paying a price for it in the present.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money OnHargreaves Lansdown