Planning for Fixed Rate Mortgage Expiry

In this article, we look at the options available to those whose fixed mortgage rates are coming to an end at a time when standard variable rates, and indeed new fixes, are likely to be higher than their previous fixes. This is useful reading if you are preparing for any of the CII CF6, R07, R06, or AF5 exams.

This article is correct as at 13 August 2024.

Interest Rates

Since December 2021, interest rates have sky-rocketed. At that time, fixed-rate mortgage deals could be found for under 1%, whereas today average rates are around the 5% mark.

To illustrate the severity of this change on a customer’s budget, let’s compare a 25-year £300,000 repayment mortgage at both rates:

£300,000 @ 1% = a monthly payment of £250.

£300,000 @ 5% = a monthly payment of £1,250.

Source: https://tools.moneyhelper.org.uk/en/mortgage-calculator

That’s an extra £1,000 a month!

Fixed rate coming to an end?

FCA figures suggest that over 1.5 million homeowners will come to the end of their fixed rate deal in 2024. Mortgage rates have started to decline with expectations that the Base rate will do the same later in the year, but they are still significantly higher than at the start of the decade.

So, if a customer’s fixed rate is coming to an end, what should they do?

Assess the financial situation

The first step for a customer, when assessing their own financial situation, is to create a budget. They can use a budgeting tool or a spreadsheet to record and monitor their income and expenditure.

Once they can see their current situation clearly, they can determine whether they need to make cutbacks. Where this is the case, they can prioritise their expenditure by identifying the expenses that they are committed to make each month (such as their council tax and utility bills) and those which are discretionary. While committed expenditure cannot be avoided, they may be able to shop around to get cheaper deals on, for example, utility bills and insurances.

They should ensure that they have an adequate emergency fund to cover at least 3-6 months of living expenses.

Checking their credit score would also be a good move at this point. The higher their credit score, the better the mortgage rates they will be able to secure. There may be steps they can take to improve their credit score, such as paying off any debts, making sure payments are made on time and resolving any mistakes that are on their file.

Interest Rate Options

In addition to speaking to their current lender about the options they offer when the fixed rate ends, a customer might like to see if a different lender can offer them better terms.

They need to think about whether they’d like to fix again. This would provide peace of mind in terms of knowing exactly how much their monthly payments will be for the term of the fix. Or, whether they’d be comfortable with their monthly payments moving up and down in line with the lender’s standard variable rate. This might be attractive just now with rates forecast to fall, but when such a fall may happen is by no means guaranteed.

Customers should be aware that whatever option they take, there may be additional costs involved. For example, a booking fee for a fixed rate or remortgaging fees for moving to another lender.

They can either make these decisions by themselves, or consult a mortgage adviser who will be able to find them a suitable product based on their individual demands and needs.

What if it still costs too much?

If, after putting together a budget and looking at the various mortgage interest rates available, affordability remains an issue, they could, in the first instance, speak to their existing lender who may be better able to help in these circumstances than a new lender.

The lender might be able to extend the term of the existing mortgage, thereby reducing monthly payments. A temporary payment holiday could be available. However, in both these instances, more interest would be payable over the long term.

If the customer has savings, an offset mortgage could be an option. Or, depending on the customer’s attitude to risk, an interest-only mortgage could be considered.

Depending on the severity of the situation and the needs of the customer, downsizing or indeed selling and then renting may be the solution.

Again, a mortgage adviser can help navigate the array of options available, based on the individual’s financial circumstances.

Grab the resources you need!

If you’re studying for your CII CF6 exam, and you want to feel confident when you go to sit the exam, grab our free taster to try out one of Brand Financial Training’s mock exam papers for yourself.  Click the link to download the CF6 mock exam taster now!

Alternatively, you can download the taster for R07, R06, or AF5 if any of those exams is on your horizon.