Help! What should I do with my mortgage?

This is an audio transcript of the Money Clinic podcast episode: ‘Help! What should I do with my mortgage?’

Claer Barrett
These are nail-biting, confusing times for anyone buying a home or coming to the end of a fixed-rate mortgage. Interest rates are going up. Debt is becoming more expensive. But why then are some long-term mortgage rates coming down? And what does this all mean for your mortgage?

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Welcome to Money Clinic, the weekly podcast from the FT about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor. Last week, the Bank of England made its 11th consecutive increase to interest rates, meaning that the bank rate in the UK is now 4.25 per cent, the highest level in 14 years. And it’s not over yet. Markets are pricing in one more rate rise potentially this summer. But here’s the intriguing thing. The rates on long-term mortgage deals are actually falling. Within hours of the Bank of England’s interest rate decision, several lenders cut their best rates. And some commentators think these could fall even further by the end of this year, all of which could make a crucial difference to you if you’re trying to get on the property ladder or refinance your existing home loan. On this episode we’ll be dusting off the Money Clinic crystal ball and looking where interest rates could go next, given rising inflation and fears of slowing growth and make sense of how that links back to what’s happening in the mortgage market.

I’m joined in the FT studio today by Chris Giles, the FT’s economics editor.

Chris Giles
Hello.

Claer Barrett
And Andrew Montlake, chief executive of mortgage broker Coreco, better known as Monty. Hi.

Andrew Montlake
Hello.

Claer Barrett
Well, Chris, let’s start by talking about the macro picture. Now, at this month’s meeting, the Bank of England governor Andrew Bailey was much less gloomy than he normally is about the outlook for the UK economy. And he almost seemed to play down February’s higher-than-expected inflation figures. Here’s what he had to say when asked if the UK had dodged a recession.

Andrew Bailey
I’m much more hopeful and we’re much more hopeful of that and we’ve signalled that today. And again, I think that the really pronounced falls in energy prices are helping that because of course it leaves more spending power with people, more demand in the economy. So that’s very, very helpful. So, you know, back at the beginning of February. Yeah, we were really a bit on a knife edge as to whether there would be a recession. Certainly we thought the economy would be quite stagnant. I’m not saying it’s going to — it’s not off to the races, let’s be clear. But I’m a bit more optimistic now on that front, yes.

Claer Barrett
So, Chris, what’s your take? Has the Bank of England done enough now to get inflation under control? Do economists broadly think that they’ll go up, down, sideways?

Chris Giles
What really matters for mortgage rates is what’s happening to the sort of long-term interest rates, not what happens to the overnight rate that the Bank of England sets. That matters for variable-rate mortgages. But for two-year or five-year fixes, it really matters what the expectation of interest rates is going to be over the next two years or over the next five years. And I think we’ve seen two things happening there. And as the governor in the clip you just played said, there’s one piece of really good news for everyone in the UK, and that is that wholesale energy prices are falling. This is just good news. We are an energy importer. If wholesale energy prices fall, we’re richer and it’s not inflationary. So that is just good news. So that’s one thing and that is one of the reasons why we’re seeing some of the long-term interest rates coming down, because there’s a good downward pressure on prices.

And then there’s the potential, which is not such just good news. It’s just where is the economy? And that’s pretty uncertain at the moment where we’ve got a pretty strong labour market. And the concern there is there might be some sort of self-sustaining underlying inflationary pressures there because companies think, well, actually consumers aren’t doing so badly, we can raise our prices a bit and workers think maybe it is time to try and get a bit more money out of my employer. Both of those are perfectly legitimate things for people and companies to think. But if it all happens together, then that can turn into a self-fulfilling prophecy and give you too much inflation. So that’s one of the things the Bank of England is very much looking at, and that’s why there’s an uncertainty. But the good news, which is what Andrew Bailey was talking about, and that’s the wholesale energy prices.

Claer Barrett
Well, we like having good news to report on the Money Clinic podcast. Now, on last week’s show, I was chatting to the FT’s Katie Martin and Ethan Wu about how this rapid succession of interest rate increases is really testing the banking sector, as you said, Chris. And it’s one of the reasons behind, for example, the collapse of SVB bank in California and the problems that we’ve seen at Credit Suisse. Now, here’s a quick reminder of what Katie said in last week’s show.

Katie Martin
It’s been difficult from the start that central banks don’t want to throw the baby out with the bathwater. They don’t want to break the system while they try and fix inflation. But at the same time, they really have to manage expectations and not look like they’re spooked. Otherwise this whole situation will get worse. So I really don’t envy them.

Claer Barrett
Now, Chris, do you think that the problems in the banking sector could have more of a bearing on future interest rate decisions?

Chris Giles
Absolutely. You cannot entirely divorce the financial sector from monetary policy or interest rate decisions now. At the moment, we’re not really seeing the widespread smoke, and that’s not me being overly optimistic. We haven’t seen that yet. If we do, we will see an interest rate effect. But so far, the whole way the system is supposed to work is to try and separate these two things. And that’s what central banks are going to try and do.

Claer Barrett
And just to clarify, the interest rate effect you would get in a scenario like that would be that they would be cut.

Chris Giles
Oh, absolutely. Because if you had a banking crisis that meant banks were not lending to the public or to companies, and then that was going to have a very detrimental effect on the economy, that would have its own effect on inflation and bring inflation down because nothing would be happening, we would go into a deep recession just as we did in 2008. And then you’ve got to see interest rates come down. And so that’s why we absolutely want that not to happen. But if it were to happen, then you would certainly see an interest rate cut, quite big ones.

Claer Barrett
Now, Monty, it’s time to bring you in. You’ve been sitting there very patiently listening to Chris, but it’s been a real rollercoaster ride for mortgage rates since that disastrous mini-Budget last autumn. It’s really difficult for listeners who are thinking about remortgaging because on the one hand, rates could go up. On the other hand, rates could go down.

Andrew Montlake
Correct.

Claer Barrett
And it’s been a really long time since you’ve had this will they, won’t they . . . 

Andrew Montlake
Yeah.

Claer Barrett
 . . . kind of positioned. For the last year, everyone’s been expecting rates to go up and then before then people were just sort of it was normalised that the rates were going to stay low forever. But those lenders on Thursday last week who cut their rates below 4 per cent, two or three different firms who did that, that’s obviously below the base rate now, 4.25 per cent. Why are they offering a below market deal, as it were? What’s the sort of psychology behind offering that?

Andrew Montlake
Well, that’s simply down to the, to swap rate.

Claer Barrett
And what’s a swap rate?

Andrew Montlake
I look at them as it’s a future cost of money upon which a lot of lenders base their fixed rates on.

Claer Barrett
So it’s what financial markets are predicting, essentially, that interest rates will be at a future point. And that’s how they price.

Andrew Montlake
Yes, correct. And that usually looks at two, three, five, ten years ahead in the future.

Claer Barrett
Right. Swap rates. Got it.

Andrew Montlake
So what we’ve seen is now swap rates have fallen again. So you’ve got a five-year swap rate at 3.52 at the moment. So they expect that in five years’ time interest rates will be around about three and a half per cent. Now, for lenders working on their pricing, and it’s not quite as exact as this, but they take swap rates as a good basis of how they price their funds and their products. So actually, you’ve now got some room for lenders to start cutting their rates again, because we think actually base rates 4.25, will it go up a little bit? The market now doesn’t think that rates will go up much more. We could be at the top. So the next move could be a cut, albeit that might not come to the end of the year, even next year. But actually looking forward, rates look cheaper. So therefore the costs for lenders to come out with products is slightly cheaper. And you’re also a quarter into the new year and lenders haven’t really got going yet. So they still have money to lend. Lenders are in a much better position than they were. They need to lend to make money in to do their job. So actually, there’s some competitive pressure starting to filter through within lenders as well. So I expect we’ll see some slightly cheaper rates in the near future.

Claer Barrett
Chris, I mean, as millions of people are rolling off fixed-rate deals on really, really low rates like one, one and a half per cent, economists talk about the payment shock of having to find hundreds of more pounds a month to cover the bills. But in a consumer-driven economy like Britain, even if you’re rolling off one and a half per cent on to 4 per cent rather than 6 per cent after the mini-Budget, it’s still a lot of money that’s being taken out of people’s wallets. I mean, surely that’s going to have some kind of deadening effect on the consumer economy.

Chris Giles
It is. And that’s absolutely deliberate by the Bank of England wants to have that deadening effect because that is the ultimate way will defeat inflation as far as they think and economic theory suggests as well. So you’ve got to bring spending and demand down. Unfortunately for people, it’s a really blunt tool. So, you know, it’s totally arbitrary who’s rolling off a mortgage this year and being hit and who’s got another three years left on their five-year fixed and has come enjoying one or one and a half per cent for another three years. Totally arbitrary. There’s nothing fair about this, but that is the only tool we’ve really got to clamp down on demand because we got ourselves, along with every other advanced economy pretty much, into an inflation situation, and you’ve got to damp spending because demand spending was too strong for what the economy could produce, and that was pulling up prices. And that was definitively the case last year. And the quicker we can get rid of this inflationary pressure, the more you can think that in the longer term interest rates will be a bit lower. But it does mean that some households who are rolling off their fixed rates or have had variable rates are arbitrarily being hit and they’re bearing the brunt, whereas others are getting away, as it were, scot-free.

Claer Barrett
Yeah. I know. It is very unfair, isn’t it? Now Andrew, as things stand right now, what’s the best deal that somebody buying a property and then somebody remortgaging a property might be able to secure? Give us a flavour.

Andrew Montlake
So it’s always, the best deals are basically available for those with a good equity in their property, 40 per cent, so if you’re borrowing 60 per cent loan to value of purchasing property. But you can get two-year fixes now at 4.21 per cent through Danske Bank, although to access that you’ll need an energy performance rating on your property of A, B or C.

Claer Barrett
Wow.

Andrew Montlake
That’s coming into play now in the mortgage market. So that’s quite important. If you haven’t, then Virgin Money have a two-year fixed at 4.36 per cent. Well, Santander actually have a five-year fixed at 3.99 per cent. So that’s for purchasing. For remortgaging, actually you can get slightly cheaper five-year fixed rate through Halifax at 3.94 per cent or two-year fixes are around, again through Danske Bank, at 4.23 if you’ve got an A, B or C rating. Or 4.293 nationwide. And if you want a tracker variable rate, then they’re available through Barclays at 4.37. So we’ve seen them ease slightly and you’re seeing the longer-term fixes at least start to start with the three. But it is important to say that although rates will fall slightly, anyone expecting that rates are gonna fall back to where we’ve seen them in the last ten years are going to be upset because I don’t think that’ll happen at all. And whilst if you look at it historically speaking, 4 per cent is around the long-term average. So I think rates between three and a half to 4 per cent are going to be the norm this year.

Claer Barrett
And again, that’s if you’ve got 40 per cent equity in your property. Now typically that’s probably older borrowers, people like us, who’ve bought at lower house prices and have had more time to pay down our home loans, we’re gonna get a better deal than younger listeners who bought when prices have been inflated and maybe their deposits have been, you know, like five, 10 per cent of the property price.

Andrew Montlake
Yeah, that’s right. I mean, we have seen higher loan to value rates come down, which are a lot better than they were. So if you do only have a 10 per cent deposit, you can get a five-year fix at 4.39 with Danske Bank or 4.43 per cent or two-year fixes at 4.8 per cent. So again, they’re below the 5 per cent level where they were a couple of months ago and they’re starting to reduce slightly as well.

Claer Barrett
Mmm. Now Chris, obviously we’re seeing the words “credit crunch” appear increasingly in headlines. Now, you’ve explained that you don’t think that that is a likely scenario to play out, but nevertheless, it’s still a risk and something that people listening will be worrying about. How do you think that this could potentially play out both in the UK mortgage market and in the property market in general? Because we haven’t really seen big price falls yet. And when the loan-to-value ratio is such a crucial thing for the price of your mortgage, this is also something we need to watch.

Chris Giles
Absolutely. And we are only a year into interest rates being pretty much moved off the zero level. And if people had got very used to borrowing at one and a half to 2 per cent and that’s what they’re required to be able to afford that lifestyle, then there’s going to be a lot of people, if the norm is 3 to 4 per cent and that’s gonna, in ways, gonna stick in future, there’s gonna be a lot of people who will struggle. And that is, in the end, likely to mean that house prices will edge downwards over the medium term. Doesn’t mean there’ll be a house price crash all of a sudden, but it does mean that, it means that house prices where they were are probably unsustainably high because particularly new buyers coming into the market wouldn’t necessarily be able to afford what previously could afford when interest rates were much lower. So it’s always a mug’s game to predict house prices. But you would have thought one of the reasons that they went up so far was because interest rates seemed permanently low and now if they’ve moved back to where they would normally have been as sort of in the 3 to 4 per cent range, then you would again expect house prices to adjust downwards. Now that could just be that they stay stable for a very long time while inflation wages rise. And that would be the most painless way of having a fall in the relative price of houses compared with earnings. But that’s what you would expect. We shouldn’t be trying to scare people and say there’s going to be a house price crash or anything like that. Of course, if the wider economy went into a deep recession, no one’s expecting the economy to perform very well this year, but at the moment, it does look better than we feared towards the end of last year. But if there was a really bad period in the economy because something bad happened, most likely at the moment, that would come from some wider financial sector squall or turmoil, then you could imagine that the housing market couldn’t be unaffected by that. And if you remember back into 2008, 2009, there were falls of 20 to 30 per cent or so. It wasn’t huge, but it was still very material.

Claer Barrett
Mmm. Some interesting points there. And Andrew, just on the credit crunch point, we’re already seeing, but lenders won’t see, lots of equity in the property if you want to get the best rates. But of course, checking your own credit score, making sure there are no nasties in your credit file, absolutely essential, more than they’ve ever been for borrowers today.

Andrew Montlake
Yeah, absolutely. What you tend to find, especially if there are some kind of issues brewing, is lenders go on this flight to quality. So they like borrowers who have got good levels of equity or good deposits. And they also like borrowers who don’t have any credit issues. And it’s amazing how many little things can happen with your credit. So it is something that you should be checking, especially if you’re looking to get a mortgage in the next six months or so. Because actually, I think somewhere I read that last year there were over a million county court judgments issued to people. And a lot of those are for things like forgetting to pay a mobile phone bill of about £30 or £40. And it’s amazing how quick they are to put a mark against your name on a credit score. And there’s also sadly a lot of fraud around as well. So we have some clients come to us who don’t know they’ve got a problem, when we check their credit score actually there is a problem. So it’s about making sure that you find these things out before and then you can talk to your lender, talk to your broker, and there is something you can do.

Claer Barrett
It’s actually happened to a friend of mine recently. He had two subscriptions to BT Sport.

Andrew Montlake
Right.

Claer Barrett
He moved house, took one with him, didn’t know about the second one, so he never cancelled it. And the bills kept coming to his old address and he hadn’t redialled it to the post and that nearly ended up in the CCJ. And he’s now having to go through administrative torture to try and get it struck off his credit record. So it’s really easy for these things to spiral out of control. Now, for the last part of the show, let’s focus on providing some practical tips for those who are trying to nab the best mortgage deal now. Now Andrew, I think the first message for those who are coming to the end of a fixed-rate mortgage is be prepared.

Andrew Montlake
Yeah, absolutely. So we contact all our clients six months before their existing product expires, and that’s probably the good timeframe to start looking around. So the first thing is to contact your existing lender, see what they would offer you, have an internet search, see what’s around. And obviously in a shock, mortgage broker says talk to a mortgage broker, I would definitely do that. And if you are worried that you’re going to be on the receiving end of payment shock and your payments are going to go up, don’t just put your head in the sand because there are a lot of things you can do to try and mitigate those increases. And although this isn’t normal advice that we give, you can do things like you can extend your mortgage term. So if you’ve only got 15 years left, potentially, age permitting, you can extend that back to 25 years, which will help reduce your payments. You could potentially put part or all of the mortgage temporarily on to an interest-only basis. A lot of people don’t realise you can do half repayment and half interest only. If you’re lucky enough to have some savings, you might look at an offset mortgage and that could help to try and mitigate things. So there are things that mortgage brokers and lenders can do to assist you.

Claer Barrett
And as you were saying, six months ahead is when you should start looking. Now, often people can agree to lock in to a deal. They’re switching lender or even if they’re staying with their existing lender. And the same, if you’re getting an agreement in principle to buy a new home, you can lock in a deal. But then you don’t have to stick with that deal if market conditions change and we do see rates coming down later this year.

Andrew Montlake
No. Not at all. And again, this is where the mortgage broker really comes into their own. So at the moment, it is good to lock in first and foremost. First of all, if you are remortgaging and then a good mortgage broker will actually continue to scour the market for you. So that if you’re . . .  if you get close and you’ll say a month within expiry, you’ve got a rate of, say, 4 per cent and actually the market moves and now there’s a rate of 3.75 per cent, then potentially we’ll be able to move you on to that. So that’s no problem. It is, if you’re doing it yourself, you do need to watch sometimes that product transfer from some lenders does lock you in. So it’s important to know which lenders will do that and which won’t. If you’re buying and you’ve just got an agreement in principle, well, that’s just an agreement in principle. So that doesn’t actually tie you into anything. In fact, it doesn’t even reserve the right. You only get the rate reserved when you’ve actually made a mortgage application. But even then, when you’ve actually got a mortgage offer on a property to buy, you could, for example, exchange on that mortgage offer. And then if something better comes out, you could even, although we don’t advise that, you could even still switch. So at any point before completion, you could switch your product.

Claer Barrett
Interesting. So a lot of flexibility there for people. But given our discussion about whether interest rates could fall, some borrowers might feel bold enough to consider going on to a variable-rate mortgage, a tracker instead of taking out a fixed. Now that’s a risky move, Monty, but what are the pros and cons of trackers?

Andrew Montlake
So trackers as sort of the new black now in the mortgage industry and they’ve come back into vogue and we haven’t talked about trackers for so long. So basically a tracker rate is something that if you’re prepared to take some kind of interest rate risk on the fact that interest rates could go down, that would be great, but they could also go up, then a tracker rate might be a good option. So a tracker rate just literally tracks the Bank of England base rate. So if Bank of England base rate is 4.25 per cent and you’ve got a 1 per cent base rate tracker, you’ll be paying 5.25 per cent. If base rate does go down to three and a half per cent, then your rate would go down to four and a half per cent and vice versa. If it goes up, your rate would go up. So the key difference is between a fixed rate, apart from the variability of it, is also that a lot of them come with no early repayment charges at all.

Claer Barrett
Right.

Andrew Montlake
So if you do want some flexibility, you could potentially do one or two things. One, if you know you’re getting big bonuses or if you’re getting an inheritance, you’re getting some other money, you could knock off quite a big chunk of the mortgage at any time. Or if things do start to turn back the other way, then you could potentially lock into a fixed rate at any time. So it’s good for some people, but not for all.

Claer Barrett
Mmm.

Andrew Montlake
Playing the mortgage market is very difficult to predict what’s going to happen next. So if you are someone who thinks you’re going to, you do need to budget carefully and you’re going to lie awake at night worrying the night before every Bank of England base rate decision, then tracker rate probably isn’t for you. And it’s better to take the insurance policy, which is a fixed rate.

Claer Barrett
Mmm. Now, you mentioned overpaying your mortgage. Now, there’s been a huge rise, hasn’t there, Chris, of the number of people who are overpaying their mortgage or making a lump-sum payment to get a better rate before they fixed again. Now, Monty, could you give us some more pointers there? Because as you said, it is limited often the amount that you can overpay, although there are some rays of hope for borrowers there, too.

Andrew Montlake
Yeah, absolutely. Most lenders will allow you to repay 10 per cent per annum without penalty.

Claer Barrett
That’s including the mortgage payments you make.

Andrew Montlake
Including the mortgage payments you make, yes. There started to be a little bit of a move from some lenders offering 20 per cent, so NatWest Bank recently joined someone like Metro Bank and offered 20 per cent payments.

Claer Barrett
And that’s to all of their customers, whether they’re existing or new. So it’s a good move.

Andrew Montlake
Yeah, yeah. So that will allow you to make some lump sums, no penalties and start really, really getting into repaying your mortgage. So that’s been very helpful. A lot of people do wait until it comes to remortgage. So if you’ve got 400,000 outstanding, then they’re taking a new mortgage of, say, 350 because they’ve got some savings. And that’s where we see most people starting to really knock off their mortgage balance.

Claer Barrett
And then that way it is more flexible because once you’ve paid it off the mortgage, if you were increasing your monthly repayments, it’s quite hard to get that money back again. Whereas if you’re putting it in a savings account, maybe getting a decent rate of interest as interest rates . . .

Andrew Montlake
Yeah.

Claer Barrett
. . . pop up, if something bad happens, you lose your job, you need the money for something else and you can still get your hands on it.

Andrew Montlake
Yeah, absolutely. Or even you can look at an offset mortgage which allows you to do the best of both worlds. And that’s something that we hope will become more prevalent again.

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Claer Barrett
Yeah. Well, thank you so much there to Chris Giles of the FT and Andrew Montlake, or Monty, for all of those helpful tips, we’ve definitely squeezed the maximum loan to value out of you both. And you can read more about this in my latest FT column, “Yikes! What should I do with my mortgage?” There’s a link in today’s show notes.

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That’s it for Money Clinic with me, Claer Barrett, this week and we hope you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you interested to be part of a future episode and are looking for some expert money advice, then email us: money@ft.com. You can also take a peek at our website ft.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram. I’m @ClaerB.

Money Clinic was produced in London by Persis Love. Our sound engineer is Jake Fielding and our editor is Manuela Saragosa. And you heard original tunes this week by Metaphor Music. And finally, our usual disclaimer. The Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser or perhaps a mortgage broker. That’s the small print for now. See you back here next week. Goodbye.