Homeowners warned to lock in cheap mortgage rates NOW as interest rates set to rise this week

HOMEOWNERS have been warned to lock in cheap mortgage rates sooner rather than later or risk paying thousands of pounds a year more.

It comes ahead of the Bank of England's interest rate decision this week, when it's expected to announce a rise.

A hike in the base rate from 0.25% to 0.5% is likely to be passed on to homeowners in the form of higher interest rates on mortgages.

How your affected depends on the type of mortgage deal you have.

Around 850,000 homeowners with a tracker mortgage will see an immediate rise to their rate as it's directly linked to the BoE's rate.

Anyone on a fixed deal won't see a change straight away, but could see higher rates when they come to the end of the term, either when shopping for a new fixed deal or reverting to the standard variable rate (SVR).

Homeowners currently on an SVR could see a more immediate increase to their mortgage rate if the Bank of England (BoE) decides to hike rates - and it could cost hundreds of pounds more.

Laura Suter, personal finance expert at AJ Bell said: "Anyone on a variable rate mortgage will see their interest rates go up – mortgage companies are very quick to pass on the base rate hike.

An increase this week to 0.5% would mean paying an extra £384 a year on a £250,000 SVR mortgage and £684 on a £450,000 loan, she said.

Often just a hint of a rate rise can prompt banks to hike rates.

In December the BoE hiked the base rate from 0.1% to 0.25%. Mortgage rates started rising in October in anticipation at many banks.

And with more interest rate hikes on the cards this year, homeowners could save cash locking in the current cheap deals as soon as they can before banks increase them further.

David Hollingworth from mortgage broker L&C told The Sun: "There’s general expectation that there will be more rises to come as well so homeowners need to take notice and should review their deal if they haven’t already.

"Many elements causing the cost of living squeeze are out of our control but borrowers can take action to get a grip of their mortgage costs."

Despite mortgage rates already increasing, fixed deals currently on offer are still cheaper than lenders' SVRs "by a distance" he said.

"Fixing the mortgage rate could help save money now as well as protecting against any further interest rate rises to come," he added. 

Suter said that with markets pricing in four rate rises this year the base rate could reach 1.25% before the end of 2022.

That could add add thousands of pounds a year to the cost of some mortgages.

She said: "If this is the case, homeowners with £250,000 of borrowing will have to pay an extra £1,560 a year, or £130 a month, while those with £450,000 of borrowing will have to find an extra £2,808 a year."

“One option is to fix your mortgage now, so you lock in current rates and avoid an interest rate rise.

"Mortgage companies have already started to increase their rates, and they’ll rise again once a rate rise actually happens."

A homeowner with a £250,000 mortgage at the average SVR could save £2,124 a year by switching to the current top two-year fix, she said.

And if the base rate then goes up to 0.5% the saving would be £2,892 a year.

"If someone wanted to switch for longer they’d save less each year, but more over the term of the fix,,” she added. 

Anyone on a fixed deal should keep an eye out for when it ends, Hollingworth said.

"Those that are currently on a fixed deal will probably be locked in until the fixed rate ends but should make a diary note to start the shopping around process at least three to four months before the end of their deal, so they can have a smooth switch to the new deal."

Tips for getting the best mortgage rate

Getting the best rate on your mortgage can depend on the rates available at the time, but there are several ways to land the best deal available for you.

Usually the larger the deposit you have the lower the rate you can get.

Lloyds has just launched the cheapest ever 10-year mortgage with a rate of 1.66%, although this is reserved for those with a 40% deposit and comes with a fee of £1,000.

If you're remortgaging and your loan to value ratio has changed this could also give you access to better rates than before.

A change to your credit score or a better salary could also help you access better rates.

If you're on an SVR fixed deals are likely to be cheaper, so it's worth looking at the deals out there.

If you're nearing the end of a fixed deal it's also worth looking now as you can lock in current deals sometimes up to six months before your deal ends.

Leaving a fixed deal early will usually come with an early exit fee.

To find the best deal use a mortgage comparison tool to see what's available.

You can also got to a mortgage broker who can compare for you, but you may have to pay for this service.

It could cost a couple of hundred pounds but it might save you thousands on you mortgage overall.

You'll also need to factor in fees for the mortgage, though some have no fees at all, or you can add it on to the cost of the mortgage, but beware that means you'll pay interest on it and so will cost more in the long term.