Q&A: What does the plunging pound mean for mortgages?

What does the plunging pound mean for mortgages: From customers with fixed-rate deals to those looking to get on the housing ladder, vital Q&A on how feared rise in interest rates will affect homeowners and first time buyers

Mortgage repayments will likely soar for millions across Britain following the Bank of England’s latest rise in interest rates.

And the situation looks set to worsen after the pound began to plummet this week following Chancellor Kwasi Kwarteng’s mini-Budget announcement on Friday. 

Analysts now fear the base rate could increase to 6 per cent by next spring, while lenders, including Halifax, Virgin Money and Skipton have begun withdrawing mortgage deals as a result. 

The surging costs could spell disaster for families who are already struggling with the cost-of-living crisis. 

Here MailOnline looks at some of the key questions and what interest rate hikes could mean for you:

Why has the pound plummeted this week? 

The pound has plummeted in direct reaction to Chancellor Kwasi Kwarteng’s so-called mini-budget on Friday, which announced the biggest tax cuts in the past 50 years. 

Coupled with the massive energy bill support package, this has fuelled concerns about the scale of government borrowing. 

While there was an initial fall after the chancellor’s announcement, Sterling started to rally slightly. However, Mr Kwarteng’s comments over the weekend saying more tax cuts were coming saw further falls. 

Why has this affected mortgages? 

It is widely expected that if the pound does not rally, the Bank of England will increase the interest rate, meaning debt will become more expensive, hitting many things including mortgages. 

Simon Jones, CEO of financial comparison site investingreviews.co.uk, said: ‘Sterling’s slump is fuelling speculation that the Bank of England may need to take action by hiking interest rates even before rate-setters hold their next scheduled meeting in November. 

‘Remember, more than two million homeowners on variable rate mortgages are already reeling following seven successive increases in the base rate since last December. 

‘Millions more on fixed rate deals will find their repayments have skyrocketed when it comes time for them to re-mortgage.’

How will those with fixed rate mortgages be affected? 

Homeowners on a ‘fixed’ mortgage pay back their loans on an agreed interest rate over a certain period of time. 

It means that any changes the Bank of England makes to the base rate will not affect them until the end of their fixed period. 

However there are 1.8million borrowers who are currently locked into cheap fixed deals which are due expire over the next year.

They now face paying thousands of pounds more a year when they come to remortgage as lenders frantically hike rates to reflect analysts’ predictions. 

For example, someone who took out a £200,000 two-year fixed mortgage in March 2021, when the average rate was 1.5 per cent, would see their annual bill leap by £7,000 if rates rise to 6 per cent, according to figures from investment firm AJ Bell.

In December the average rate for a two-year fix was 2.34 per cent, it is now 4.33 per cent. 

As of last year, around 75 per cent of homeowners had fixed rate mortgages, with almost half of these (45 per cent) locking in for five years.  

The Pound fell dramatically in the wake of Kwasi Kwarteng’s mini-Budget, but the Bank of England stopped short of an emergency interest rate hike

Everything you need to know about the Sterling crisis 

What has happened?

The pound, which was already at a 37-year low against the dollar, has fallen further. Sterling was trading at more than $1.16 when Liz Truss became Prime Minister just 20 days ago. It fell close to $1.08 on Friday and went as low as $1.0386 during overnight trading in Asia. UK bonds have also slumped – pushing up the cost of government borrowing.

Why is sterling down?

The dollar has been surging against all currencies as it combats inflation with aggressive rate hikes. The US economy also looks healthier than those of Britain and Europe. Meanwhile Britain has been racked by political uncertainty and a cost of living crisis. The Bank of England has not acted as forcefully to combat inflation as expected and new Chancellor Kwasi Kwarteng has stunned markets with the biggest tax cuts in 50 years. Coupled with the massive energy bill support package, this has fuelled worries about the scale of government borrowing. Mr Kwarteng doubled down over the weekend, pledging: ‘There’s more to come’. The pound then resumed its sell-off.

What can be done?

The Chancellor has ruled out a U-turn, leaving the Bank of England to watch the markets.Governor Andrew Bailey says the Bank ‘will not hesitate’ to hike rates if needed, but that may not be enough to halt the pound’s rapid slide.

Can a weak pound have advantages?

UK exporters will find their products are more competitively-priced against global rivals. However, components for products made in the UK are often made abroad so those exporters will in many cases be absorbing higher costs.

What does it mean for households?

Holidaymakers will find their spending money does not stretch as far and filling up a car could also become more expensive because oil is priced in dollars and will cost more to import. According to the AA, the average tank of petrol has already increased by £7.50. When the pound falls, it can also push up prices in the shops as the cost of buying goods from overseas rises. Meanwhile, the Bank of England is expected to raise its base rate, making borrowing – especially on mortgages – more costly. There is no guarantee that banks will pass on rate rises to savers – and even then it is unlikely to stop the value of savers’ cash being eroded by high inflation. The impact on investments depends on whether companies are sensitive to a weaker pound.

How will homeowners with a variable rate mortgage be affected?  

Homeowners with variable mortgages must pay the interest rate set by the Bank of England, meaning any such increase results in an immediate uptick in their monthly repayments. 

The average Standard Variable Rate in December was 4.4 per cent and that had risen to 5.4 per cent in September, according to Moneyfacts, before last week’s 0.5 percentage point base rate rise.

For a £250,00 mortgage, the cost in December was £1,375 a month, but this has now climbed to £1,521; costing £1,752 more annually.

Those with larger loans for £350,000 will have been charged £1,926 a month in December 2021, but £2,129 for the same deal this month. This comes to an additional £2,426 a year.

How will first time buyers be impacted? 

The average first time buyer will face monthly repayments upwards of £1,100 once banks pass on the latest interest rate rises, property portal RightMove has said. 

That figure is a third more than they were paying in January. 

It means it will be more difficult for people get onto the property ladder, as they will need to prove they can pay back the higher amounts. 

First-time buyers are now spending more than an estimated 40 per cent of their monthly salary on mortgages, the highest proportion since November 2012.  

On average, a first-time buyer will now need to stump up £22,400 (assuming a 10 per cent deposit) if they want to buy a home – representing a 57 per cent increase in a decade, in which wages have risen by just under a third. 

Vadim Toader, CEO & Co-Founder of Proportunity, a London-based Fintech property firm, told MailOnline: ‘It is yet again first-time buyers who are being hit hardest by the UK’s economic woes. The weakening of the pound and increasing interest rates has put lenders in a tough position, where it is not viable for them to offer the mortgage rate deals we were seeing only last week. 

‘This means, to access a decent rate, home buyers will need significantly higher deposits. However, it is unlikely that those saving to buy a house will see the recent interest rate increases passed on to their savings rates, making raising that larger deposit on their own, a longer and more arduous task. Quite the opposite, it will also most likely mean a further increase in rent prices (given landlords mortgages will also go up), which means saving will be that much harder.

‘It couldn’t come at a worse time either, with Help to Buy applications set to end in just over a month, many potential first time buyers will see home ownership as an impossible dream. While the government has recently reduced stamp duty fees, in today’s market conditions, it only really benefits those already on the property ladder, leaving first time buyers high and dry.’ 

What if I have a few months left on a fixed rate?  

You may have to remortgage on what will likely be a higher rate, as banks increase repayment costs to reflect analysts’ predictions.

However homeowners should check what deals they can strike with their current lenders, before comparing them to their competitors. 

Borrowers are advised to speak to their lender as soon as possible if they are worried about making the payments on their mortgages or the impact of switching deals.

Some lenders have extended the length of time you can lock in a new deal ahead of the end of your existing mortgage term, allowing borrowers some certainty about the next rate they will be paying.

Should I get a new deal now? 

Homeowners should check what deal they can get with their lenders, as every mortgage is different and varies. 

If you still have two to three years left on a fixed rate, a mortgage broker can calculate whether getting out early and signing a five or 10-year fixed rate would be worth the cost of a ‘redemption penalty’.

Meanwhile, major lenders like Barclays, First Direct, HSBC and NatWest are offering to guarantee rates for an unprecedented nine months. Customers can start a ‘product transfer’ between four and six months before their current deal is up for renewal. 

Simon Gammon of Knight Frank told the Telegraph that Nationwide was offering the most generous window. 

‘They give you up to three months in which to get the mortgage offer approved and then you have six months to use it,’ he said, effectively guaranteeing the rate for nine months. 

‘Locking in now could save you 0.3 percentage points. That may not sound like much, but for a five-year fixed rate that’s 1.5 percentage points of your mortgage saved,’ Mr Gammon said. 

How much will two-year fixed deals increase by? 

For the shortest term deal, a two-year fix the rise can be felt sharply. In December the average rate for a two-year fix was 2.34 per cent, it is now 4.33 per cent, reports ThisIsMoney.

£150,000 mortgage up £1,800 a year: Those with a £150,000 mortgage with a 25-year term on the average rate would have paid £661 a month for a deal in December at 2.34 per cent, but now that is £811. This is an increase in annual payments of £1,800.

£250,000 mortgage up £3,000 a year: For borrowers with a £250,000 mortgage, £1,102 monthly payments in December last year have climbed to an average of £1,352. This means an additional £3,000 a year.

£350,000 mortgage up £4,200 a year: Buyers or homeowners with a larger £350,000 mortgage will now be paying £1,893 a month on average for a deal compared to £1,543 in December last year. This will cost an additional £4,200 a year.

How much will five-year fixed deals increase by?   

The average five year fixed rate mortgage has increased from 2.64 per cent in December last year to 4.33 per cent this month following the base rate rise, according to data from Moneyfacts.

£150,000 mortgage up £1,644 a year: For a five-year fixed mortgage of £150,000 with a 25-year term in December 2021 borrowers would have paid an average monthly payment of £683. This has now increased to £820, a rise of £137 a month and costing £1,644 more annually.

£250,000 mortgage up £2,724 a year: For the same rate on a £250,000 mortgage the monthly payments have increased from £1,139 in December 2021 to £1,366 in September this year. Annually borrowers would be paying an additional £2,724 on their mortgage.

£350,000 mortgage up £3,804 a year: And for those at the higher end of borrowing with a £350,000 mortgage their monthly payments would have totalled an average of £1,595 in December but taking out the same five-year fixed deal now will cost £1,912 a month. This comes to an additional £3,804 annually.

How much will 10-year fixed deals increase by?   

The average ten year-fixed rate mortgage has increased from 2.97 per cent in December last year to 4.33 per cent this month following the base rate rise.

Longer fixed rate mortgages often cost more because of the certainty they provide the borrower, but the average rate of 4.33 per cent is now the same as a five-year fix.

They are also incredibly niche compared to shorter term deals.

£150,000 mortgage up £1,332 a year: Those taking out a £150,000 mortgage on a ten year fixed rate deal in December will have paid an average of £709 a month. This has now risen to £820, costing borrowers an additional £1,332 in mortgage costs annually.

£250,000 mortgage up £2,208 a year: For those with a £250,000 mortgage, monthly payments in December were £1,182, according to data from Moneyfacts. However, these payments will now have risen to £1,366 costing an additional £2,208 a year.

£350,000 mortgage up £3,096 a year: A £350,000 mortgage will have cost £1,654 a month in December but borrowers taking out a new deal today will be paying nearly £2,000 a month at £1,912. Overall they will pay £3,096 more annually than those who fixed their rate at the end of last year.

How much will standard variable rates increase by?

Borrowers on standard variable rates feel base rate rises keenly as they are often passed over to the borrower, whereas those on fixed term deals aren’t hit until they reach the end of their term.

Standard variable rates were already quite high compared to base rate and fixed rates when the Bank of England started its hikes and so have not risen by as much as base rate – although the latest round of rises are yet to come through.

The average SVR in December was 4.4 per cent and that had risen to 5.4 per cent in September, according to Moneyfacts, before last week’s 0.5 percentage point base rate rise.

£150,000 up £1,056 a year: Those with £150,000 of borrowing on a SVR will have paid £825 a month in December but the same amount this month would be £912 monthly. This is an additional £1,056 a year.

£250,000 mortgage up £1,752 a year: For a £250,00 mortgage the cost in December was £1,375 a month but this has now climbed to £1,521; costing £1,752 more annually.

£350,000 mortgage up £2,426 a year: Those with larger loans for £350,000 will have been charged £1,926 a month in December 2021 but £2,129 for the same deal this month. This comes to an additional £2,426 a year.

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