Is your fixed mortgage deal ending? Brokers reveal what those facing higher payments can do

Hundreds of thousands of households are currently deliberating what to do when their fixed mortgage deal comes to an end.

Between July and the end of December this year, an estimated 900,000 households will reach the end of their existing fixed rate term, according to UK Finance data.

Many will be coming off mortgage rates between 1 and 2 per cent, taken at a time when interest rates were at rock bottom.

Now, for the most part they face the prospect of remortgaging to a rate of around 4 per cent or more.

The lowest five-year fixed rate in August 2020 was 1.33 per cent, according to Moneyfacts. Now, it is 3.86 per cent.

On a £200,000 mortgage with a 25-year repayment term, that's the difference between paying £784 and £1,040 a month.

The jump in costs makes the decision on whether to fix for two or five years feel even more important.

Two-year fixes offer borrowers the chance to lock in for a short period of time in the hope that deals will be cheaper when they next come to remortgage.

Five-year fixes will appeal to those that think the risk isn't worth taking, accepting there is no guarantee that mortgage rates will be lower come 2027.

Key deciding factors also include whether someone may move home soon, how much they prefer the security of fixed payments for longer and how well they could cope with a rise in mortgage bills.

For those who feel a two-year deal is slightly too short and a five-year fix too long, there are now also plenty of three-year deals.

Santander's mortgage lending figures suggest a preference for shorter-term fixed rate deals.

Of its 60,000 customers so far this year, it says 54 per cent opted for two-year fixes compared to just 36 per cent opting for five-year deals.

The bank's lowest two-year fixed rate remortgage deal is currently 3.8 per cent, while its lowest five-year fix is 3.86 per cent - both come with £1,058 of fees.

However, others say the gap is not as dramatic. Mortgage broker, Mortgage Advice Bureau says that since the start of the year, 54,534 of its customers have taken a two-year fix compared to 49,927 who opted for a five-year deal.

David Hollingworth, associate director at L&C Mortgages says he recently saw two customers that were coming to the end of their very low five-year fixed rate deals - both less than 2 per cent.

The first is thinking about a two-year deal which will see an increase to a rate of 3.92 per cent and push payments up by almost £490 a month.

The other is considering a five-year fix which would result in a 3.96 per cent rate and push their payments up by more than £500 per month.

Neither chose to extend their mortgage term - one of the options to reduce unaffordable monthly payments, though it increases the amount owed over the long term.

'Both have decided to keep their mortgage term the same and are taking on the additional monthly cost,' said Hollingworth.

'Of course, they've made different decisions about how long to fix for which may come down to a combination of how much they think rates may move in the next couple of years and how much certainty of payment they want for how long.

'There's no right or wrong answer to that and we'll only know with hindsight which approach works out to be the cheapest.'

Aaron Strutt of mortgage broker Trinity Financial says the vast majority of borrowers are sticking with their existing lender when it is time to refinance.

Households coming to the end of a fixed-rate mortgage should be offered what is known as a 'product transfer' by their current lender.

This gives them the option to switch to a new deal instead of automatically being moved onto their lender's more expensive standard variable rate.

The benefit of product transfers is that borrowers don't have to go through all the same checks and balances they would if switching to a new lender - though it might also prevent them from getting the best possible deal, as there is no guarantee their lender will have the market best-buy at the time they need to remortgage.

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Product transfers tend to require less paperwork, no new affordability assessment, and no re-valuation of the property.

There are typically few to no additional product fees required, and no solicitor costs either.

However, Strutt suggests that the extra admin of switching to a different lender may be worth it.

He says: 'We did go through quite a prolonged period where the lenders were offering cheaper rates for people buying a home rather than remortgaging. This seems to have shifted with some lenders much keener to attract remortgage customers again.

'If your deal is coming to an end soon then it is well worth checking to see if there are better rates available through rival lenders. There's no point in giving your lender money for the sake of it.

'Competition in the market has improved and there are lots of deals available below 4 per cent.'

There has been a rise in the number of people remortgaging to raise funds for home improvements or pay off debt, according to Strutt.

'We are arranging more remortgages with capital raising for people who want another £20,000 or £30,000 for home improvements, while other homeowners are doing debt consolidation remortgages,' said Strutt.

'One of our clients recently did a huge refurbishment on his property and increased the value significantly.

'He remortgaged away from his lender to recoup the money he spent and locked into a sub-4 per cent five-year fix.

'We have also had clients remortgaging to gift a deposit to their adult children to help them get on the property ladder.'

Paying off some of the mortgage debt, or carrying out renovations that significantly increase your property's value, can mean that someone may get a lower mortgage rate.

Both enable households to build up greater equity within the property, whilst the percentage owned by their mortgage lender reduces.

These levels of equity that measure the size of the mortgage versus the property's value are known as loan-to-value.

Lenders will have different rates at varying loan-to-value levels, and someone at 60 per cent loan-to-value (in other words, with 40 per cent equity) could pay substantially less than someone at 90 per cent loan-to-value.

'Paying off some of your mortgage may mean you qualify for a better rate,' adds Strutt. 'If you have done renovation work to your property it may well be worth getting another valuation done by your lender or another one to see you have more equity.'

Nichola Jomoa, a mortgage adviser at Mortgage Advice Bureau says she has seen borrowers increasing the term of the mortgage in order to cope with higher rates.

The mortgage term is the number of years someone agrees to repay their mortgage for, which used to commonly be 25 years but on new mortgages is more often 30 years.

By lengthening the term of a mortgage, a borrower spreads their repayments over a longer period of time and therefore reduces the monthly costs.

However, it will mean paying interest for a longer period of time and therefore paying more in the long run.

For example, someone with a £200,000 mortgage paying 4.5 per cent interest over 20 years would face monthly repayments of £1,265, paying a total of £303,672 over the lifespan of the mortgage.

Conversely, someone with a £200,000 mortgage paying the same interest rate over a 40-year term would face monthly repayments of £899. However, they would pay £431,580 over the lifespan of the mortgage: £127,908 more than on a 20-year term.

'We are seeing an increased number of clients extending their mortgage term to keep their monthly payment at an affordable level,' said Jomoa.

'This may not always be possible and can be impacted by age. In some cases, it can lead to a higher interest rate.

'It could mean mortgage payments continue into retirement, and can potentially add several years of expensive interest to mortgage balances.'

It is possible to reduce the term again later on if financial circumstances change.