Households face mortgage reckoning as they move from 1% rates to 5%: Here's what it means for your bills...and what you can do about it

A huge number of homeowners face a mortgage reckoning as they come to the end of their sub-2 per cent five-year fixed rates over the coming months, new analysis shows.There are hundreds of thousands of households who locked into super cheap five-year deals in 2021 and the first half of 2022 who now face a painful shock when they come to remortgage.Many households, spurred on by super low interest rates and their experiences of lockdown during the pandemic, took on larger mortgages in order to buy bigger and more expensive homes.Five years on, with higher oil prices, renewed inflation and a global bonds sell off rattling financial markets, interest rates are back on the rise.Despite the Bank of England holding base rate this week, investors are now betting that rates will jump from the current 3.75 per cent to 5 per cent by November next year.Mortgage lenders are now frantically re-pricing to protect their own margins with one lender describing mortgage funding conditions as a 'bloodbath'. Trouble ahead: Households coming to the end of their cheap five-year fixes will see their monthly costs go up between now and September next yearHomeowners with mortgages soon to expire are set to bear the brunt of this market turmoil.In October 2021, the average of the lowest five-year fixed rates across the top ten lenders was just 1.05 per cent, according to broker L&C Mortgages.The same measure today is 5.05 per cent, marking an increase of 4 percentage points.Someone who locked in a £400,000 mortgage on a 1.05 per cent five-year fix in October 2021 will have been paying £1,517 a month for the last five years.By now, with their total mortgage reduced to £328,000 they might have hoped their monthly payments would become lower, not higher.Instead, they face the prospect of seeing their monthly payments jump by £657 to £2,174 for the next five years.Spending hundreds of pounds extra each month will likely prove even harder given how much more expensive everything else has become over the last five years.What £10 could have bought you in 2021 now effectively requires £12.86 on average thanks to surging inflation. It means the cost of petrol and diesel is higher and the weekly grocery bill is more expensive.Exclusive analysis for This is Money and the Daily Mail shows that a £25.04 basket of 25 supermarket essentials in September 2020 now costs nearly £38 today, representing a 50 per cent uplift in prices.If that wasn't enough, the typical household energy bill is higher than it was in early 2021 when it was between £1,042 and £1,138 per year. Now it's £1,663 a year – rising to £1,723 next month and potentially beyond £2,000 in January if early forecasts are correct. While average wages have also increased, much of the benefit will have been nullified by higher taxes and frozen tax thresholds. How much will your mortgage go up by if you're able to get the best rates? Original mortgageMonthly costs between 2021-2026 (1.05% rate)What the mortgage is now New monthly costs 2026 to 2031 (5.05%) £100,000£379£82,000 £543 £250,000 £948£205,000 £1,359£500,000 £1,897£410,000 £2,717£1,000,000 £3,794 £821,000 £5,442*Above calculations assume 25-year repayment term to begin with, moving to a 20-year term when remortgaging . All on a capital repayment basis. There will be many households who locked in between the winter of 2021 and August 2022 who will also be looking on at the mortgage market with a degree of trepidation having secured low rates prior to the disastrous mini-Budget of September 2022 when Liz Truss was Prime Minister.Those who locked in the best mortgage rate up until February 2022 could potentially have locked into a rate as low as 0.99 per cent.But even in April rates were as low as 1.81 per cent while in August they started from 3.09 per cent.'Many homeowners are going to worry about rates and how much their monthly bills are going to rise,' says Aaron Strutt of mortgage broker Trinity Financial.'There have been a lot of rate changes over the last week, but hopefully the number of price hikes will slow down. If the base rate goes up a few times then we can expect fixed rates to get more expensive.'While rates are going up now, they may come back down again in the not too distant future. It is pretty much impossible to predict what is going to happen to mortgage rates because there is so much global insecurity.'David Hollingworth of L&C Mortgages says it could be particularly hard for those that took big mortgages or who have had a change in circumstances in the meantime. 'For example, tighter income levels may have been possible to cope with whilst the interest rate was locked at a low but that could be significantly harder when it snaps into the current rate environment.' Lowest mortgage rate five years ago for someone with a 40% deposit or equity Date Lowest rateMonthly cost of £250k mortgage October 2021 0.91%£932 Nov 21 - Feb 22 0.99% £941 March 2022 1.51% £1,001 April 2022 1.82% £1,038 May 2022 2.04% £1,065 June 2022 2.31% £1,097 July 2022 2.74% £1,151 August 20223.09% £1,197 Present day 4.77% £1,429 *Mortgage calculation based on 25 year repayment term Source: Moneyfacts What can households facing higher rates do? In terms of preparation, it is possible to reserve a new mortgage rate six months ahead of the current deal ending.Most mortgage brokers advise doing this in case the situation gets worse. If rates drop it will be possible to apply again.There are still two and five year fixes available well below 5 per cent.For example, HSBC has a two-year fix at 4.79 per cent and a five-year fix at 4.75 per cent both with a £999 fee and for those with a 40 per cent deposit.Make overpayments David Hollingworth suggests trying to use any spare savings to pay down the mortgage ahead of the remortgage date. 'One thing on many borrowers’ side will be that they will have known that this moment is coming, which may help some to have prepared,' says Hollingworth.'The most prepared may have begun to allocate more to their mortgage budget already and making overpayments or saving into a separate account will help make life easier.'Anyone with time left on a low fixed rate may still want to make the most of that time and start to readjust now. 'Paying that into a savings account each month could build up a ‘fighting fund’ that could reduce the balance further when taking on a new, inevitably higher interest rate. 'Having a smaller mortgage to deal with can’t be a bad thing but it will also have helped shift to the new level of outgoing that they could be facing.'Switch to a tracker mortgageSwitching to a tracker mortgage is another option – though this will involve rolling the dice over your future monthly costs.Tracker mortgages follow the Bank of England base rate, plus a certain percentage on top.For example, someone might be given a tracker mortgage at base rate, currently 3.75 per cent, plus 0.3 per cent.This would set the rate they pay at 4.05 per cent. If the base rate rose to 4 per cent, though, their mortgage rate would rise to 4.3 per cent. If the base rate was cut to 3.5 per cent the tracker rate drops to 3.8 per cent.Many borrowers are opting for tracker rates, according to broker Aaron Strutt. However, with predictions of multiple base rate hikes later this year and next year, he says this has the potential to backfire.'If you do take a tracker, the base rate will have to rise a fair few times before a fix looks like a better option,' says Strutt.'If you do take a tracker, opt for one without exit fees so you can switch to a fix if you need to. 'Barclays’ best buy 3.99 per cent two-year tracker is also still topping the best buy tables and hanging on in there. I am surprised that this sub-4 per cent rate has not been pulled yet. 'Lots more borrowers have been taking tracker rate mortgages than normal as they look for a way to dodge the higher fixed rates.'Lengthen the mortgage term One way to lower your monthly bill is by lengthening the term when you come to remortgage. This could at least give you some much-needed short-term relief.The mortgage term is the number of years someone agrees to repay their mortgage for. Historically, this was 25 years for nearly all customers. But now borrowers often choose 30 years or even longer.By lengthening the remaining term of a mortgage, for example extending it from 20 years to 25, a borrower spreads their repayments over a longer period of time. This reduces the monthly cost.However, this isn’t a decision that should be taken lightly, according to Hollingworth. He adds: 'The long term cost can be enormous. As the mortgage is being repaid more slowly the total interest charge will ramp up and can easily add up to tens of thousands of pounds more over the life of the mortgage.'If it’s a necessary option it should be kept under review and as the situation hopefully improves, the term could be trimmed back again or overpayments made to eat away at the mortgage more quickly.'Are you facing a mortgage shock in coming months? editor@thisismoney.co.uk Best mortgage rates and how to find them Mortgage rates have shot up again due to inflation triggered by the conflict with Iran reversing hopes that the Bank of England would cut rates. This means those remortgaging or buying a home face higher costs.That makes it even more important to search out the best possible rate for you and get good mortgage advice, whether you are a first-time buyer, home owner or buy-to-let landlord.This is Money's partner L&C can help you with its fee-free mortgage service.> Compare mortgage rates> Find the right mortgage for you To help our readers find the best mortgage, This is Money has partnered with the UK's leading fee-free broker L&C.This is Money and L&C's mortgage calculator can let you compare deals to see which ones suit your home's value and level of deposit.You can compare fixed rate lengths, from two-year fixes, to five-year fixes and ten-year fixes.If you’re ready to find your next mortgage, why not use This is Money and L&C’s online Mortgage Finder? It will search 1,000s of deals from more than 90 different lenders to discover the best deal for you.> Find your best mortgage deal with This is Money and L&C Mortgage service provided by London & Country Mortgages (L&C), which is authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.