How to minimise the damage as mortgage rates rise

Millions of homeowners will be feeling anxious today as mortgage rates rocket past 6%, adding hundreds of pounds to their monthly borrowing costs and making the cost-of-living crisis even worse. Interest rates looks set to climb higher still, with the Bank of England set to hike base rates again and again, as it battles to curb today's red-hot inflation. 

This is a huge worry for 2.5 million homeowners whose cheap two and five-year fixed rate deals will expire in the next 18 months. Anybody who is in this uncomfortable position should stay calm and consider their options. Here are five ways to escape the mortgage crunch. 

Probably the biggest mistake any borrower can make is to let their current mortgage deal expire without doing anything about it. At that point, they will automatically revert to their lender's standard variable rate (SVR), which could charge 8% a year or more. 

To avoid that, owners should shop around for a market-leading deal well before their existing mortgage expires. They can contact their own lender but also look at best buy deals on the open market, possibly after talking to a broker. 

It's possible to a line up a new deal anything up to six months in advance, allowing you to take advantage of today's rates before they climb even higher. This could offer much needed protection, as market analysts reckon the BoE base rate will carry on climbing.

Line up a new deal in advance

If mortgage rates surprise everybody by falling before your new deal begins, some lenders will allow you to take a cheaper alternative. Ask in advance.

If you’re really struggling, there are ways of cutting your monthly mortgage costs.  

One option is to extend the term of your loan. Somebody borrowing £200,000 at 6% over a 25-year term would pay £1,289 a month. If they increased their term to 35 years, their monthly repayment would fall to £1,141, saving £148 a month (which adds up to £1,776 a year).

There’s a downside, though. As you will be paying interest for 10 years more, this will cost you an extra £94,422 over the 35-year term. However, you could reduce the damage by cutting your term later when you’ve got more cash. 

Another option is to switch to an interest-only mortgage for the time being, which would cost the cost of servicing the same 25-year mortgage to £1,000 a month, saving £289 a month. Just remember that at some point, the capital must be repaid.  

The smaller your mortgage the manageable it will be, so shrink yours if you can. Most mortgages now allow borrowers to make overpayments of up to 10% of their loan’s value each year, without incurring penalties (always check, though). 

Overpaying a £200,000 mortgage by just £100 a month would cut the total interest payments by a staggering £32,021 and clear the mortgage three years and eight months early, too. Paying in a one-off £15,000 lump sum instead would save £44,685 in interest and shave almost four years off the term. 

Check your finances and see if you are able to overpay your mortgage

Think twice before using all your spare cash to shrink your mortgage—keep some on hand for emergencies such as car repairs or illness. And always clear costlier debts first, such as a credit card. 

Or consider an offset mortgage, that allows you to use your savings to shrink your mortgage interest, while still allowing access to your money if needed. Talk to a broker if tempted. 

Previously, lenders were swift to repossess when house prices crashed and borrowers couldn't keep up with repayments. This time, they’re likely to be more lenient. 

If struggling, talk to your lender, which will set out your options. If worried about money generally, contact Citizens Advice or debt charity StepChange. As the pressure builds, doing nothing is not an option. 

Read more: What is happening in the property market right now?

Read more: Are these factors devaluing your home?

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