New mortgage borrowers could end up paying thousands more for a home loan

High numbers of home-owners are set to refinance their mortgages in the coming year.

But some may find themselves paying tens of thousands of pounds more over the course of their new home loan than they would have done if they had taken out a deal just a year ago.

A string of Bank of England base rate increases over the last 12 months has pushed up borrowing costs – and mortgage rates jumped in the wake of the mini-budget, with many deals also being withdrawn.

While borrowers on variable mortgage rates have felt the immediate impacts of base rate rises, those on fixed-rate mortgages have been cushioned from this – until they need to take out a new deal.

Around four-fifths (78%) of outstanding mortgages are fixed rates.

Average two- and five-year fixed-rate mortgages breached 6% in the autumn of 2022, but lenders have slowly been making reductions to their mortgage pricing since then.

Base rate rises have pushed up borrowing costs immediately for some borrowers on variable mortgage rates.

Many borrowers are on fixed rates, which have cushioned them from the immediate impacts of the higher interest rate environment. But they could get a shock when they come to take out a new deal.

Trade association UK Finance has said around 1.8 million fixed-rate mortgage deals are scheduled to end in 2023.

Someone taking out a £200,000 mortgage in December 2022 could typically face paying around £1,269 per month on a two-year fixed-rate mortgage, compared with around £881 per month if they had taken out a deal in December 2021, according to calculations by Moneyfacts.co.uk for the PA news agency.

Over the course of the two-year deal, this would add up to them paying around £9,310 more.

And someone with a £200,000 mortgage taking out a five-year fixed-rate could face paying around £1,249 per month, based on calculations made in December 2022. A year ago, they would have typically paid around £911 per month, based on the deals available in December 2021.

Over the course of a five-year mortgage, this could add up to a cost difference of around £20,000.

The calculations were based on a 25-year mortgage term and compared average mortgage rates on December 9 2022 with those in December 1 2021.

The average two-year fixed-rate on December 1 last year was 2.34%, but by December 9 this year it was 5.84%.

The average five-year fixed-rate on the market on December 1 2021 was 2.64%. On December 9 2022 it was 5.67%.

The rates borrowers are offered by lenders will depend on individual circumstances, including how much equity they have in their home.

Mortgage rates also vary day by day and are influenced by several factors.

Moneyfacts’ figures show that, in the days after the most recent Bank of England base rate increase, on December 15, the average two-year fixed-rate mortgage edged down slightly, from 5.83% to 5.82%.

The average five-year fixed-rate mortgage remained unchanged, at 5.63%, between December 15 and December 19.

Rachel Springall, a finance expert at Moneyfacts.co.uk, said lenders are slowly making reductions to their fixed pricing.

“However, those with limited deposits might sit on the fence a little longer to buy their first home as the cost of living takes its toll,” she said.

“Borrowers might prefer to lock into a longer-term fixed-rate mortgage during 2023 due to the prevalent interest rate uncertainties over recent months, but this will depend on their circumstances.

“As the mortgage market remains volatile, its vital borrowers seek independent advice to consider the deals on offer to them, or whether they need to be a little patient in hopes rates will fall further.”

Mortgage borrowers also have less choice of deals generally than they did around a year ago.

On December 1 2021, there were 5,315 mortgage deals on the market, according to Moneyfacts.

But by mid-December 2022 there were just under 3,800 deals.

The choice of mortgage deals has improved, however, compared with 2,258 products counted by Moneyfacts on October 2 2022.

Some borrowers may want to consider using a mortgage broker to help them find a suitable deal.

Chancellor Jeremy Hunt recently met with banking chiefs, along with consumer champion Martin Lewis and the Financial Conduct Authority (FCA).

The bank chief executives, who cover more than 70% of the market, recommitted to protect mortgage holders by enabling them to switch to a new fixed-rate mortgage, without a new affordability test, when their current deal ends if consumers are up to date with their payments.

Mortgage lenders should also provide customers with well-timed information ahead of rate changes.

The FCA has also said it expects lenders to support struggling customers in a range of ways that suit their needs.

UK Finance has predicted rising mortgage arrears from early 2023, increasing through the year and into 2024.

It expects the number of households in arrears to reach 98,500 next year, representing around 1% of outstanding mortgages.

Home repossessions increased modestly in 2022 as lenders and the courts worked through cases that had built up during the coronavirus pandemic.

UK Finance expects this to continue slowly through the next two years, as the backlog is cleared, although it added that arrears and repossessions remain low compared with longer-term figures.

It is encouraging borrowers to contact their lender early to discuss the options available for their circumstances.

A spokesman for UK Finance said: “The high level of activity during the 2021 stamp duty holiday means that a large number of borrowers are due to refinance next year.

“However, there is wide availability of product transfers and we would encourage customers to speak to a whole of market mortgage adviser to discuss the options best suited to their circumstances.

“As always, any customers who find themselves in difficulty should speak to their lender at an early stage, as the industry stands ready to help with a range of options that can be tailored to best suit individual customers’ circumstances.”