With interest rates projected to shoot up in the coming months, pre-booking your mortgage could save you thousands of pounds in the long run, but you could end up losing out now. Here's everything you need to know.
Over the past 2 years mortgage rates have reached record lows and many people have seen their mortgage repayments fall with them.
However, most economists are now predicting an end to these low rates which could see your mortgage rate and repayments jump in the coming months.
Yet there may be a way to cushion the blow if you act sooner rather than later - most mortgage providers allow you to book a mortgage deal anywhere up to 6 months in advance.
This means you can continue to take advantage of low Standard Variable Rates while they’re still around before switching to the safety of a fixed mortgage when rates start to climb.
How does it work?
Although mortgage rates are still relatively low at the moment, they are expected to start rising in the coming months. Given that fixed rate deals seem to be getting gradually more expensive already, now may be the optimum time to book a cheap deal while they’re still available.
If you approach a mortgage provider and seek an agreement in principle, they will in most cases be able to hold the rate they offer you for up to 6 months.
Pre-booking a mortgage deal in this way could meant that you continue to benefit from your lender’s low SVR while it lasts, but have the security of knowing that you are going to be able to fix into a low rate deal a number of months down the line.
Are rates guaranteed to increase?
No one can predict for certain whether mortgage rates will rise in the near future. However, in recent months the rates which lending institutions charge each other have slowly started to climb.
Add to this that it’s also heavily rumoured that the Bank of England base rate will start rising from its record low of 0.5% over the coming months and, if you’re on a flexible or tracker deal, the cost of your mortgage could certainly start to climb.
Should I fix?
Before rushing out to pre-book for a fixed rate mortgage deal, it’s worth considering the likely speed of any rate increase.
Although mortgage rates are likely to start rising, very few people are predicting a big jump.
So if you are still on a very low SVR you may want to stick it out and take your chances that the money you save on repayments now will make up for the fact that you’ll miss out on the most competitive fixed term deals.
However, if you are planning on locking in to a fixed rate in the near future it would make sense to reserve a deal while they are still low. Fixed rate mortgages are becoming increasingly more expensive so you may end up paying significantly more if you wait until you’re ready to commit before applying.
If you’re currently tied to a deal that finishes within the next 6 months it's worth starting to look what's out there now, you can read our guide When Should I Start Looking for a New Mortgage? for more information.
Breaking out
Even if you are tied into a high fixed rate deal which has more than 6 months to run you may want to consider breaking your terms and switching to a more competitive deal while they are still around.
If you are considering this option you will need to make sure that any Early Repayment Charges or penalties you’ll incur for breaking your terms and conditions are sufficiently offset by the savings you’ll get by making the switch.
Read our guide Should You Switch Your Mortgage Deal Mid-Term? to find out how to work out whether breaking out is worth your while.
How to decide whether to pre-book
1. Your current deal
Whether you opt to prebook a new mortgage deal will depend on where you are starting from.
If you are currently on your bank’s standard variable rate then you are likely to be at the greatest risk of a potential rate increase in the coming months.
2. Can you get a lower rate?
With rates predicted to rise, mortgage lenders are already beginning to withdraw their most competitive fixed rate mortgage deals.
As a result if you wait for 6 months to start looking for a fixed rate deal it’s likely that you’ll end up with a higher interest rate.
Perhaps the only likely exception to this scenario is if you are on the threshold of a lower loan to value bracket. For example, if in 6 months time you will be eligible for a 90% LTV mortgage rate rather than a 95% LTV now, you may still be able to get a lower rate.
This is going to be particularly relevant if a decline in house prices has pushed you into negative equity or increased the loan-to-value ratio at which you’ll need to borrow.
3. Can you afford an increase?
If you can comfortably afford an increase in mortgage repayments then you might feel it’s worth holding fire to take advantage of low rates before fixing.
However, if you would struggle to pay any more than you are and want the reassurance of a guaranteed monthly payment down the line you should consider pre-booking a new deal now.
You'll need to decide how long you want to tie in for and compare the deals that allow you to prebook with those that don’t in case it works out cheaper to lock in now.
Read our guide Should I Fix my Mortgage? for help weighing up your options.
4. Surf the SVR
If you can afford an increase in mortgage repayments and decide to surf on your lenders SVR until rates rise you will need to keep an eye on rate movements.
You should also consider overpaying if you can, or putting money aside into accessible savings accounts so you can afford repayments if they rise further down the line.
Best of both worlds?
If you are still unsure what route to take you could try and get the best of both worlds by pre-booking a mortgage but breaking the agreement if rates stay low.
If you are considering this option you’ll need to find out exactly what the penalties are if you change your mind.
If they're not significant you may be able to pre-book so as to hedge your bets but then break the contract if better rates are still available.
For more help on getting the best mortgage deal read our guide How to get the best remortgage deal.
