Q Our mortgage is split into two parts, as we ported a section of our original mortgage when we moved in 2021. The 2.5% fixed-rate part of the mortgage (on a balance of approximately £210,000) is coming to an end next August.
I’m incredibly worried about the possible interest rate rise when we have to renew. We have already absorbed a £300 hit when we renewed the other part of the mortgage last year, and I’m not sure how we would cope if our bill rose by the same again – but looking at the current rates, that may well be what we’re faced with.
I am due a one-off bonus at the start of November (likely to be between £5,000 and £6,000) and I would like to use it to help ease our financial burden. Some of it needs to go on house repairs, which we’ve been holding off on, and hopefully pay for a holiday, as we’ve not been able to have one this year – leaving between £2,000 and £3,000 for the mortgage.
Currently, about half of our monthly mortgage payment is interest. Would it be better to overpay the mortgage by £2,000 to £3,000 in one lump sum as soon as I get the money (presumably reducing the percentage interest due, and therefore increase the proportion of our monthly payments that goes towards paying off the mortgage itself) – or would it be better to invest in one of the higher-interest savings accounts available?
I’m nervous about the fixed-rate savings account options – if our mortgage does increase again by a few hundred pounds, we may need access to that money to help offset the payments for the first few months while we adjust. However, I know the more flexible savings account options offer lower rates, which may affect which of the options is more beneficial.
CM
A I’m not surprised that you are incredibly worried about possible interest rate rises when you come to the end of your fixed-rate term. If your revert rate – the technical term for the interest rate you move on to when a fixed rate ends – next August was the eye-wateringly high 8% (or higher) currently charged by many mortgage lenders, your monthly mortgage repayment (assuming a 25-year term) would go up from £940 a month to £1,620 – an increase of almost £700. If the revert rate was just double your 2.5% fixed rate, the monthly increase would be more like the £300 increase you have already had to swallow.
But that assumes that you move on to your lender’s revert rate. You can avoid doing that by arranging to switch to a new mortgage deal in time for your current fixed rate coming to an end in August. Under the government’s mortgage charter, all lenders that have signed up to it must give you the option of switching.
You can also ask to make interest-only payments for a maximum of six months to reduce your monthly payments, or extend your mortgage term (which has the same effect).
As to whether it is worth using some of your anticipated lump sum to pay off less than 1% of your mortgage, I’m not sure. I certainly wouldn’t commit any of it to overpaying the mortgage until after you’ve been on holiday and had the house repairs done, as building costs can have a nasty habit of creeping up as work is done. If you do have £2,000 left over, using it to overpay the mortgage will have a negligible effect as it would save you £8 a month on your current deal. Putting £2,000 in a no-notice account paying at least 5% in interest would earn you £100 a year, which is the equivalent of £8.30 a month.
