Is your fixed-rate mortgage deal ending? Do you have a plan for the increased cost? More than one million homeowners fixed-rate mortgage deal will end this year meaning a jump in monthly repayments due to rising interest rates.

In this article we will share 5 tips on how you can reduce the impact the interest rates will have on your monthly payments.

How are the interest rates going to impact you?

Interest rates have soared since December 2021, when the base rate sat at 0.1% and you could find a two-year fixed-rate mortgage for just 0.89%. Fast forward to 2023 and the average two-year fixed rate is nearly 6%.

We did some basic calculations to see how you may be affected by the interest rates depending on the value of your home:

Example 1 – Property value: £500,000

Lower interest rates

Property value£500,000
Mortgage value£375,000
Mortgage interest1.3%
Term25 years
Monthly mortgage repayments£1,464.78
Total payments over 25 years£439,433.80

Higher interest rates

Property value£500,000
Mortgage value£375,000
Mortgage interest4.73%
Term25 years
Monthly mortgage repayments£2,133.63
Total payments over 25 years£640,088.58
Increase in mortgage payment£668.85
Example 2 – Property value: £750,000

Lower interest rates

Property value£750,000
Mortgage value£562,500
Mortgage interest1.3%
Term25 years
Monthly mortgage repayments£2,197.17
Total payments over 25 years£659,150.69

Higher interest rates

Property value£750,000
Mortgage value£562,500
Mortgage interest4.73%
Term25 years
Monthly mortgage repayments£3,200.44
Total payments over 25 years£960,132.86
Increase in mortgage payment£1,003.27

As you can see from these figures, there’s quite a marked increase in mortgage payments!

What should I do if my mortgage deal is coming to an end?

If you secured a fixed mortgage before 2022 and are therefore likely to end up paying a higher rate of interest when your deal ends, here are five ways to ensure you’re prepared.

1. Check when your current mortgage deal ends

The first step to take is to ensure that you know when and to what extent your circumstances will change. Check your mortgage contract to find out exactly how long you have before, if you take no action, you are automatically moved over to your lender’s standard variable rate.

Ensure you are clear on how much you currently pay each month to help aid you in budgeting when you shop around to look for a new deal. Check what your outstanding mortgage balance will be at the end of your current deal, as you will need this when applying for a new one.

2. Overpay your mortgage if you can afford to

If you have some time before your mortgage fixed-rate deal runs it, and you can afford to, overpay your payments now.

This way, when you switch over to your next deal, you will have less to repay and a lower amount of which to fork out steeper interest payments on.

Most lenders let you overpay your mortgage by 10% of the remaining balance each year penalty-free. However, different lenders have different policies on reducing your balance this way, so be sure to check the terms before doing this.

Alternatively, you may wish to look to invest this money if you get a better rate on investments but be careful if you are putting it into an investment that risks capital.

3. Extend your mortgage term to lessen the impact

If you can’t afford to overpay or need to get a new deal now, by spreading the cost over a longer period, you can reduce your monthly payments, although you will ultimately end up paying more interest over the life of the loan, it’ll help you right now before you can switch again when the interest rates come down.

4. Speak to a mortgage broker and re-mortgage

If you choose to remortgage, you can either try to get a new deal with your current mortgage provider, or shop around to find a different mortgage provider offering an even better deal.

A mortgage broker can be a great help in doing this. Your mortgage broker can search the whole market and recommend the best mortgage deals for you, based on your specific needs.

Your lender will want to know if your circumstances have changed, as this could affect your affordability assessment and credit score.

Common changes that may affect your mortgage prospects include having children, taking on new debts, or becoming self-employed.

What are the costs of re-mortgaging?

When you remortgage, there will usually be additional costs involved.

These may include:

  • Early repayment fee (which may apply beyond the length of your fixed rate)
  • Arrangement fee (can be high)
  • Booking fee (usually no more than £200)
  • Valuation fee (though with re-mortgaging this is often free)
  • Conveyancing fee (again, usually free when you remortgage)
  • Mortgage broker fee (if applicable)
  • Sometimes the combined fees might potentially outweigh the savings you stand to make through re-mortgaging to a new deal, so consider this carefully (again, your mortgage broker will help you work this out).

When is the best time to remortgage?

Ideally, you should start planning to remortgage around six months before your fixed rate period ends. Acting early can also help you avoid extra payments. When you actually remortgage may be influenced by a couple of other factors.

Most lenders will allow you to agree a rate with them six months before you start paying. You can lock in some good deals ahead of time, but you will still be able to change to a better one if one arises before your renewal date.

Bear in mind that your fixed rate period may include early repayment charges, which may apply beyond the length of your deal.

These charges can run in to thousands of pounds sometimes, so you may be better off staying on the SVR for a short time rather than re-mortgaging immediately.

It’s also worth speaking with your current mortgage lender and seeing what rate you could get by conducting a product transfer. This is when you switch over to a new deal with the same lender. This will likely have much better rates than if you switch to your lenders standard variable rate.

5. Grow your business to improve profits to cover increase

Another option is to try and budget for the increase in mortgage payments by growing your business. By increasing profits, you can improve your cash flow to cover the additional costs of your mortgage repayments.

There are many ways you can do this including increasing your prices, increasing your employee’s productivity, expanding into a new market or releasing a new product or service etc.

But how do you know where to start?

The first step in growing your business is to ensure that your accounts are up to date. This means keeping accurate records of all your income and expenses and making sure that your financial statements are current and accurate. Without this, you can make decisions on how you’re going to grow your business.

Next focus on the areas that are most profitable. This means looking at your turnover, cost of sales, and gross profit margins, and identifying the products or services that are generating the most revenue.  Additionally, assess your profit trees to help you identify where your profits are coming from. A profit tree breaks down your revenue into different categories, such as product lines or customer segments, and shows you which ones are most profitable. This can help you make better decisions about where to focus your resources.

Not all products or services are created equal either. Some may be more profitable than others, while others may be loss leaders that you offer to attract customers. It’s important to identify which products or services are low-margin, and either find ways to make them more profitable or cut them altogether.

Similarly, some clients or jobs may be more trouble than they’re worth. They may be poorly priced, require too much time or resources, or be difficult to work with. It’s important to identify these clients or jobs and either find ways to make them more profitable or cut them loose.

If you’re buying materials or supplies in bulk, you may be able to negotiate better prices with your suppliers. This can help you reduce your cost of sales and increase your profit margins. It’s important to build good relationships with your suppliers and negotiate from a position of strength.

Think about how you can leverage your time and increase the productivity of your team. There are lots of ways to do but start by utilising automation and AI to help you streamline your business processes and reduce costs. For example, you could use software to automate your invoicing, or customer service tasks.

This is a very brief overview of ways to grow your business, but it’s so much more important than just growing to help you pay your mortgage rates. Did you know that just to stand still this year you need to increase your turnover by 19% due to inflation, cost of living and tax rises. Watch our video which goes into more detail on how you can grow your business this year.

How can we help?

When your fixed-rate mortgage is coming to an end, it is important you take proactive steps to  ensure you are not caught off guard by the increase in your re-payments.

While we are not mortgage advisers, we can help you reduce the impact on your living costs by advising you on how to increase your investments or growing your business.

If you’d like any further detail on anything mentioned in this blog post or the increased cost of living we’re all experiencing, book a free consultation with one of our advisers now.