There’s a good chance you’ve seen recent headlines discussing rising mortgage rates. Indeed, the BBC states that the average five-year fixed-rate deal stood at 6.01% as of 4 July 2023, while the average two-year fixed-rate deal was 6.47%.

For reference, the last time two- and five-year fixed-rate mortgages rose above 6% was after the mini-Budget from former chancellor, Kwasi Kwarteng, in September 2022.

As you can imagine, these higher rates could have a considerable effect on your finances. According to the BBC, payments by mortgage holders will amount to somewhere between 28% and 30% of their income, compared to an average of 20% in previous years.

Continue reading to discover why rates have increased so much recently, and three ways you can effectively manage rising mortgage costs if you’re struggling.

Higher-than-expected inflation has contributed to climbing mortgage rates

As mentioned, rates have been rising considerably recently, and the Guardian shows how much this could affect the amount you spend on your mortgage.

If you had obtained a new mortgage deal at the end of May 2023, you would be paying £648 more each year than someone who secured an equivalent deal at the start of May 2023, based on a typical two-year fixed-rate £200,000 capital and interest mortgage.

Additionally, if you obtained the same £200,000 mortgage priced at around 3% in May 2022, you’d be paying around £3,600 more each year for an equivalent deal today.

High inflation has primarily been the leading cause of this significant rise. The Consumer Prices Index (CPI) fell from 10.1% in the year to March 2023 to 8.7% as of 29 June 2023.

While this indicates that things are moving in the right direction, it’s still well above the Bank of England’s (BoE) annual inflation target of 2%.

In response, the BoE has increased its base rate – the rate that essentially determines interest rates across the rest of the economy – hoping this will encourage saving and reduce the demand for goods and services. This, in turn, should slow price growth.

Since its historic low of 0.1% in 2021, the BoE has increased the base rate 13 times consecutively, reaching 5% at the latest review on 22 June 2023.

A rising base rate is generally unwelcome news for borrowers, as lenders will typically adjust mortgage rates accordingly.

According to the Times Money Mentor, Barclays, HSBC, Santander, and Virgin Money increased their fixed-rate deals by up to 0.85% at the start of June 2023 in response to the rising base rate, while TSB withdrew some of its fixed-rate deals from the market altogether.

3 ways to deal with rising mortgage rates

While mortgage rates have been climbing considerably in recent months, you can manage these higher costs in several ways – read on to find out how.

1. Find a new deal before your current one expires

Before your current fixed- or tracker-rate mortgage deal expires, it could be worth being proactive and securing a new one.

Expiring deals will be a common occurrence in the next couple of years – the Guardian reports that around 800,000 fixed-rate mortgages will expire before the end of 2023, with a further 1.6 million coming to an end in 2024.

If you have a fixed- or tracker-rate mortgage expiring soon, your lender will usually move you onto their standard variable rate (SVR). The SVR is set at the lender’s discretion and is often uncompetitive compared to other rates.

That said, you have a window to secure a new deal before your current one ends. You may be able to secure a new deal up to six months before your current deal expires. By locking in a new fixed- or tracker-rate deal now, you may be able to save money on repayments before interest rates rise further and your lender moves you to their SVR.

When securing a new deal, your lender may offer you a “loyalty” deal to encourage you to stay with them. Before you simply accept this, it may be worth shopping around for a new deal.

This is because the deal your existing lender offers may not be as competitive as others on the market.

As such, it may be worth remortgaging with a new lender, as you may find a cheaper or more appropriate deal for your circumstances.

2. Talk to your lender about alternative arrangements

If your mortgage payments have risen sharply and you’re concerned about how you will maintain them, it may be worth asking your lender whether there are any ways you can make your repayments more affordable.

One solution to temporarily reduce your monthly payments could be to extend the overall length of your mortgage term.

According to MoneyHelper’s mortgage calculator, a £200,000 capital and interest mortgage with a rate of 5% over a 25-year term and a loan-to-value of 85% would see you pay £993.80 a month.

Yet, if you extend your term to 30 years on the same mortgage, your monthly payments will drop to £912.60.

It’s important to remember that, while you would reduce your monthly payments by extending your term, you may pay more in interest overall. This is Money gives a fitting example of this.

If you have a £200,000 mortgage and are paying 5% interest over 25 years, you’d face monthly payments of £1,169 and pay a total of £350,754 over the complete term.

The same mortgage over a 35-year term would see you pay £1,009 a month, though you would pay a total of £423,937 over the full term. This is because you'll pay more interest over time since you’re paying off your mortgage for longer.

As you can see, while you would reduce your monthly payments, you would pay an extra £73,183 over the additional 10 years.

As well as a term extension, you may be able to take a payment holiday. This is essentially an agreement where your lender allows you to stop or reduce your monthly payments temporarily.

Depending on your personal circumstances and payment history, you may be able to take a break for up to six months, though not all lenders offer the option of a payment holiday.

It's important to note that you still accrue interest during the payment holiday, and when it ends, your outstanding balance and payments could be higher than they were before. This may result in more financial problems when the payment holiday is over.

You may also be able to switch your mortgage from a capital and interest deal to an interest-only one, in which your monthly repayments only cover the cost of the interest.

You could remain on an interest-only mortgage moving forward, or your lender may allow you to temporarily switch to an interest-only mortgage, which could be helpful if you’re facing financial difficulties.

However, it’s important to note that you’ll still owe your lender the outstanding amount when you switch to an interest-only basis, typically when you come to sell the property. Also, you may end up with less equity if your property’s value drops, meaning the amount you owe back exceeds the value of your property.

Make sure you factor in these potential drawbacks before you ask your lender to make this switch.

3. Speak with a professional

Above all, it may be worth speaking with a mortgage expert if you’re struggling with repayments. We could help you source a new, more competitive deal if your current one is ending, potentially protecting you from your lender’s SVR.

Better yet, we could search the market for you, ensuring you obtain the best available deal for your personal circumstances.

Even if your current deal doesn’t expire for some time, we can discuss the different options available to you to ensure that rising mortgage rates don’t negatively affect your finances.

To discuss this more, please email or call (0207) 808 4120.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

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