How to navigate the mortgage market meltdown

mortgages interest rates
mortgages interest rates

The mortgage market was thrown into turmoil this week when lenders withdrew deals in record numbers in anticipation of further interest rate rises.

The best available fixed rate at the time of writing is a 10-year deal with Barclays at 3.65pc with a £999 fee – a far cry from the sub-1pc mortgage deals available this time last year.

What does all this mean for homebuyers and those who need to remortgage to a new deal? Here we answer your questions on how to navigate the fast-moving and ever-changing market – and what may happen next.

What caused this week’s mortgage meltdown?

Within hours of the pound tumbling after the mini-Budget last week, markets priced in the Bank of England’s central interest rate surpassing 6pc early next year to limit the impending economic fallout.

On Monday spooked lenders began to withdraw mortgage deals by their hundreds in a bid to get ahead of interest rate rises. By Tuesday 284 deals had disappeared from the market and a ­further 935 had gone by Wednesday – the biggest drop ever recorded by the analyst Moneyfacts.

The hundreds of thousands of borrowers remortgaging in the coming months, and anyone looking to buy, will see a sharp rise in their monthly payments as a result.

Are there still mortgage deals available?

Most lenders are still offering deals to existing borrowers who remortgage or make a “product transfer”, although the rates will be higher. Some deals for new borrowers remain and banks are likely to relaunch more in the coming days or next week, but they will be much more expensive.

If you are trying to contact a lender to discuss a new rate, expect a long wait on the phone or online – tens of thousands of other borrowers are trying to do the same. If you are unsure which deal is the best for you or whether you should lock in now, use a regulated mortgage broker.

My mortgage is due to expire next year. Should I wait before locking in a new rate in case they drop?

The consensus is that the only way is up for mortgage rates next year, so waiting a few months to lock in could cost you thousands in the long run.

The cheapest five-year fix at the time of writing is 3.9pc with Allied Irish Bank. But if the best deal rises to 6pc in the first half of next year, borrowers will need to pay an additional £305 a month on a £250,000 mortgage – or £18,300 over the lifetime of the deal.

It is imperative that borrowers searching for a fixed-rate mortgage lock in a deal sooner rather than later, before rates rise again. Many mortgage offers can be held for six months, and some even nine months, which allows borrowers to lock in an interest rate half a year before they need the loan.

“Borrowers who act quickly stand to save a lot of money,” said Simon Gammon of the broker Knight Frank Finance. Do the maths to work out whether it is worth paying the early repayment charge, to break your fixed deal early, in order to lock in to a lower rate than you may be able to get in future. But while time is of the essence, be careful not to panic and commit to an unsuitable deal. Leaving a fixed-rate deal early if circumstances change can incur costly penalties.

I need a mortgage now. Should I lock in for two, five or 10 years?

No one can predict where interest rates will be in a few years’ time and choosing the length of your fixed deal ultimately comes down to personal circumstances. David Hollingworth of the broker L&C Mortgages said: “Five-year deals have been really popular recently, especially when there is little difference in the average rate compared with two-year deals. Five years give you mid-term security and will come with a buffer against any rate rises ahead. But you won’t benefit from any rate drops in that time.”

How can I secure the cheapest mortgage deal possible?

Borrowers with cash to spare are the least risky customers for lenders and will therefore be able to get the best rates. If you can afford it, overpaying your mortgage will increase your equity in the property, reduce the amount you are borrowing and open up lower rates. The same applies to deposit sizes. The lower the percentage of the property value you borrow and the more equity you put into the property, the happier lenders will be to offer lower interest rates.