New Bank of England data shows that those worst affected could face payment hikes of more than £500 a month.
Read on to find out what's happening to mortgage rates and for our advice on getting the best deal when remortgaging.
Millions of mortgage holders face higher repayments
Rates have fallen this year, but the current average of 5.52% remains well in excess of the rates currently paid by many homeowners.
Bank of England data shows around 4.4 million homeowners will need to remortgage to a more expensive deal in the next three years. Of these, 31% will move on to a rate above 3% for the first time.
Those affected will mainly be people who fixed their mortgage rates for five years or longer before mid-2022, when rates were low.
The typical homeowner will see their monthly repayments rise by £146 when they remortgage, but an estimated 420,000 households will have to budget for an increase of more than £500 a month.
The graph below shows how the average rates on two- and five-year fixed-rate mortgages have changed over the past five years.
Will any homeowners see their repayments fall?
The Bank forecasts that more than a quarter of mortgage holders will see a drop in their monthly payment over the next three years.
For example, someone who fixed for two years in December 2022 (when the average rate was 6.01%) will now be due to remortgage and should be able to get a cheaper deal.
Find out more:I’m remortgaging: how long should I fix for?
Data from Moneyfacts shows two-year fixed-rate mortgages are twice as popular as five-year deals, with many borrowers choosing shorter fixes in the hope that rates will be lower in a couple of years.
When it comes to choosing a fixed term, there's no right or wrong answer, and it's important to think about your circumstances and future plans.
If you think you might move in the next couple of years, a two-year fix could be a better option. Longer-term fixes usually come with early repayment charges (ERCs), which are calculated as a percentage of the outstanding balance and can amount to thousands of pounds.
You should also consider your attitude to risk. A five-year fix offers stability over a longer period, protecting you from potential rate increases.
Which term is cheapest?
Five-year fixes are currently slightly cheaper than two-year deals. The exact difference in cost will depend on your circumstances, including how much you’re borrowing and the term of the mortgage.
To illustrate how rates impact repayments, we’ve calculated estimated monthly repayments using the cheapest two- and five-year deals at three different loan-to-value (LTV) levels.
These calculations assume you're borrowing £200,000 over a 25-year term. Based on these scenarios, a two-year fix would cost between £10 and £70 more per month compared to a five-year fix.
What will happen to mortgage rates in 2025?
The Bank of England's base rate has an impact on the cost of mortgages, and it's expected to fall gradually next year from the current rate of 4.75%.
The Organisation for Economic Co-operation and Development (OECD) and the Office for Budget Responsibility (OBR) provide forecasts for future base rate changes.
The OECD predicts the base rate will fall to 3.8% by the end of 2025. Similarly, the OBR estimated in October that the base rate will dip just below 4% by 2026.
If these predictions come to pass, borrowers can expect to benefit from cheaper mortgage rates in 2025. However, it's highly unlikely rates will sink anywhere near the lows recorded in early 2022.
Find out more:Tips for remortgaging
1. Find out when your fixed term is coming to an end
As most homeowners have fixed-rate mortgages, it’s crucial to know when your term is due to expire.
Being on an SVR is usually more expensive and leaves you vulnerable to rate increases at any time, potentially leading to significantly higher monthly repayments.
You can typically arrange a new mortgage up to six months before your fixed term ends.
2. Speak to an expert
A broker will be able to search the market to find the best mortgage for you. Bear in mind that a handful of lenders, such as First Direct, don't offer mortgages via brokers.
Find out more:3. Find out your loan-to-value
If you're coming off a long fixed term, you may have moved into a lower loan-to-value (LTV) bracket. This is important because it could help you get a cheaper rate.
For example, if you took out a 90% mortgage five years ago, you'll now own more of the property, so you may be able to remortgage at 80% loan-to-value.
Lenders will usually conduct a remortgage valuation to determine the property's current value.
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