The UK's Mortgage 'Timebomb': Unpacked by Better.co.uk

Your home could be repossessed if you do not keep up repayments on your mortgage. You may have to pay an early repayment charge to your existing lender if you remortgage. Any savings will vary depending on personal circumstances.

The economic landscape is ever-changing. The UK has experienced a sudden surge in mortgage rates, driven by the Bank of England's efforts to curb high inflation. As a result, homeowners and potential buyers are facing challenges that we at Better.co.uk believe need to be addressed.

Why increasing the base rate affects your mortgage

Increasing the Bank of England base rate directly impacts variable mortgage rates (those that are tied directly to the base rate). However, it also has a knock-on effect on fixed-rate mortgage deals.

Better.co.uk’s Head of Mortgage Operations, Amanda Aumonier, states that:

"Lenders have a range of funding strategies, many of which are impacted by the base rate, which determine the mortgage rates they can offer. Raising the base rate, again and again, will cause an increased risk of mortgage payment defaults, decrease the appetite of first-time buyers and increase market uncertainty. 

Whilst managing inflation is essential, it's vital to strike a balance that doesn't excessively burden homeowners or the housing market”.

The average two-year fixed-rate residential mortgage rate has risen significantly, with similar trends in the five-year fixed-rate deals​.

Raising the base rate aims to control inflation, but with inflation stubbornly remaining at 8.7% in May, raising the base rate again has sparked the UK’s mortgage timebomb. 

For homeowners coming off historically low mortgage rates – such as those during the pandemic – the grip of the cost of living crisis has tightened. 

So, what is being done?

No extra government assistance for homeowners

Despite the mounting pressure, the UK government has decided against providing additional help to homeowners struggling with rising mortgage costs. Instead, the government remains committed to its plan to halve inflation as a method to tackle the cost of living crisis​.

It's not just homeowners who are feeling the pinch. As buy-to-let mortgage rates have increased, landlords have passed some of their mortgage burdens onto their tenants. As a result, renters now spend a record proportion of their disposable income on rent​. 

Are you sitting on your own mortgage timebomb?

Determining whether you’re sitting on a mortgage timebomb requires you to analyse your financial situation in detail. Here are some signs you might be at risk, along with steps you can take to evaluate your situation.

  1. Variable rate mortgages: if you’re on a variable rate mortgage, rising interest rates increase your monthly payments. Check your mortgage agreement to determine your interest rate, and speak to your mortgage adviser to see if you can switch to a more cost-effective rate. 

  2. High loan-to-value ratio (LTV): A high LTV ratio means you've borrowed a significant amount compared to the value of your property. If property prices fall (as they are predicted to do so) you may run the risk of falling into negative equity. If you do, then remortgaging becomes difficult, as lenders are unlikely to lend more than the property’s value.

  3. Interest-only mortgages: If you have an interest-only mortgage, you're only paying off the interest each month, not the capital. This can be risky if your plan for repaying the capital (like selling the property) doesn't work out as planned. 

  4. Reliance on Low-Interest Rates: If you've based your budget around low-interest rates, a rise could make your repayments unaffordable. It's always wise to factor in potential interest rate rises when budgeting.

  5. Over-Stretched Finances: If you're already struggling to meet your mortgage repayments or other bills, any increase in interest rates could exacerbate your financial difficulties.

Mitigating the timebomb: practical steps for homeowners

Here are a few practical steps homeowners can take.

  • Overpay your mortgage: If you can afford it, overpaying your mortgage can help reduce the overall amount you owe, thereby reducing the impact of interest rate rises when you have to remortgage.

  • Review the whole market: when you come to remortgage, it’s now essential to review every option available to you. If another lender has a more cost-effective rate you’re eligible for, it’s important to consult with a mortgage broker to try and secure it. 

  • Secure a new mortgage rate when the time is right: you can secure a new mortgage rate up to 6 months before your existing mortgage is due to expire. With rates constantly in flux, securing a new rate now may mean you avoid future potential rises. Should rates come down, Better.co.uk mortgage advisers will be able to switch you to a lower rate, depending on your eligibility.

  • Seek professional advice: If you're unsure of the best course of action, seek advice from a mortgage broker or financial advisor, and talk to your existing lender about payment options when possible. 

Remember, every homeowner's situation is different, and the best course of action will depend on individual circumstances.

Better.co.uk's response to the mortgage 'timebomb'

At Better.co.uk, we believe in proactive solutions. We're here to help you navigate these challenging times. We cannot stress enough the importance of getting advice from a mortgage expert. Mortgage advisers can both help you understand how your individual situation is impacted by current market dynamics and what you can do about it. 

Their expert insights can provide you with personalised strategies that take into account your unique circumstances. 

Additionally, we offer a range of resources such as our mortgage calculators, comparison tools, and advice on remortgaging​​. Remember, with the right tools, advice, and expertise of a mortgage adviser, the mortgage crisis can be managed. We’re here to help.

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Important info & marketing claims

You may have to pay an early repayment charge to your existing lender if you remortgage. Your savings will depend on personal circumstances.

Your home may be repossessed if you do not keep up repayments on your mortgage.

*The savings figure of £656 is based on Better.co.uk remortgage customers in April 2024. Read more on our marketing claims page.

We can't always guarantee we will be able to help you with your mortgage application depending on your credit history and circumstances.

Average mortgage decision and approval times are based on Better.co.uk's historic data for lenders we submit applications to.

Tracker rates are identified after comparing over 12,000 mortgage products from over 100 mortgage lenders.

As of January 2023, Better.co.uk has access to over 100 lenders. This number is subject to change.

For buy-to-let landlords, there's no guarantee that it will be possible to arrange continuous letting of a property, nor that rental income will be sufficient to meet the cost of the mortgage.