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UK mortgage rate increases Autumn 2022 – what people with UK property need to know

This article provides an overview for what expats and non-residents with mortgages on UK properties should be considering and highlights the conditions where they should be talking to a UK mortgage specialist.

Written on 11 October 2022

Interest rates in the UK are on the increase after more than ten years at record lows which means that any expats or non-residents with mortgages on UK properties need to understand how this will affect them.

Added to the rising interest rates, the number of fixed rate mortgages available from UK lenders has dramatically reduced over the past 4 weeks as the uncertainty around the UK housing market and weakened GBP against other major currencies continues. This combination of events has had a significant impact on both affordability of existing mortgages and an increase in cost of new fixed rate agreements.

It's likely that mortgage product availability is likely to reduce further, while the lending criteria tightened as lenders establish new baselines for products to avoid a potential market crash as experienced in 2008.

This article provides an overview for what expats and non-residents with mortgages on UK properties should be considering and highlights the conditions where they should be talking to a UK mortgage specialist.

Impact of fewer fixed rate UK mortgage products

Firstly, and importantly, the removal of fixed rate mortgage products will not result in your existing mortgage being cancelled. Any product withdrawal affects new applications only and therefore if you have more than 6 months remaining, this will not affect you until you come to renew your mortgage.

However, when that time comes, you will almost certainly have fewer options available and all of which will be higher that any existing rate you have currently got.

If you are currently in the process of securing your mortgage, speak to your broker or lender to find out the state of play with your product availability. If there is an issue, you would likely have been contacted and presented with your options, but it’s important to get any clarity on your situation as soon as possible to avoid any nasty shocks as completion approaches.

Who is impacted by rising interest rates?

The people most affected by the continuing interest rate rises are those who are on variable/tracker mortgages that are tagged to the Bank of England’s base rate.

Your mortgage interest rates will have already increased and will have increased your monthly payments as a result. Your lender and potentially your broker should have already contacted you with information relating to your new rates and payments so be sure to open any emails or letters from either lender or broker.

If you are on a fixed rate mortgage you won’t be affected until your fixed rate agreement comes to an end. You have nothing to worry about just yet, but interest rates are unlikely to fall and are expected to continue rising. Therefore, it is a good idea to work out what your monthly repayments might look like when you have to renew so you can plan any changes to your situation to be able to meet any new mortgage repayment amounts.

What should I do if my mortgage rate is coming to an end?

If your current mortgage product is coming to an end within the next 12 months, speak to your lender or mortgage broker to discuss your options.

If you are on a fixed rate mortgage and have more than 6 months remaining on the agreement, you are likely to have to pay an early repayment charge in the unlikely event that you wish to exit your mortgage early.

If you have fewer than six months remaining on your fixed rate, it is important to consider your options sooner rather than later. With mortgage rates expected to continue rising, it might be prudent to lock in a rate now, rather than wait to see how much they have risen in six months’ time. Expectations are that the base rate could rise to 6% or more, which will have a significant affect on the lending rates, especially if you have a high loan-to-value.

Should I overpay my mortgage?

Normally the rule for overpaying any debt would be to clear the most expensive debt sooner rather than later. This rule would still apply for current mortgages, however if you have a large mortgage on a low interest rate, but with several years left to run - as well as a small mortgage with a higher rate but longer to run, you may wish to eat into the larger debt first.

This approach is will significantly impact the amount you will have to borrow once your low rate comes to an end.

A mortgage broker will have various repayment calculators and be able to walk you through various scenarios to help you make the most cost-effective decision – but remember there will be limits to how much you can repay (normally 10% per year) before having to pay an early repayment charge.

The impact of rising interest rates and devaluing of GBP

For UK property owners living abroad, if you earn in USD or another foreign currency you may be able to take advantage of weakened GBP. While interest rates will increase your repayment requirements, your earnings in a non-GBP denomination will be able to afford more than, say, 12 months ago when GBP was worth roughly 20% more.

Therefore, if you have savings held in non-GBP currency which is not benefitting from rising interest rates, it might be sensible looking at whether now is a good time to significantly reduce your mortgage.

A combination of a currency exchange expert and a mortgage advisor will be able to help you determine your best course of action.

What happens if you cannot afford any mortgage rate rises?

While it isn’t possible to know what your new rate and repayments will be until you know your new interest rates, even a small increase of say 3% on your mortgage rate could see your repayments rise by up to 25%.

It’s not inconceivable that your mortgage repayments may rise by 50% or more within the next 12 months if your fixed rate is increasing from close to 1% as typical fixed rate products are already hitting 6%.

Such rises are likely to impact people with buy to let properties and using rental income to repay the mortgage as UK rules forbid similar increases in rent.

Similarly, demand for UK rental properties may be high, so while you may be able to cancel any existing rental agreement and seek new tenants on a higher rental agreement.  However, as the cost-of-living crisis is impacting on virtually all but the highest earners, it’s unlikely that you will be able to find a new tenant willing to pay the significantly higher rate.

Therefore, you will have decisions to make as to whether the property itself is viable with a mortgage and consider either paying the mortgage in full (or significantly reducing it to reduce monthly payments) or selling the property altogether.

Selling a property is likely to attract additional costs as you will be liable for estate agent fees and a potentially capital gains tax bill both in the UK and your country of residence. Once again, before making any decisions, speak to a financial advisor about your options as well as a tax specialist in all the countries you are considered a tax resident to understand your tax obligations if you decide to sell.

Expert analysis on mortgage rate rises

Robert Hallums, Founder of Experts for Expats has shared his concerns but calls for calm decision making: “Anybody with a UK mortgage is essentially in the same position right now. Interest rates have been at record lows for so long and the current rises are coming faster than anybody expected. For those on longer term fixed rate agreements, the rise in rates might be delayed but it is still likely to hit at some point within the next few years.”

“For those with mortgage rates coming to an end, or for people looking to purchase a new property, the importance of speaking to a trusted expert has never been so important. Just 12 months ago there were some great cheaper mortgage products available, now they have disappeared as lenders look to protect against potential falls in house prices as well as continuing rising rates, and this trend is only likely to continue as the cost-of-living crisis in the UK worsens.”