Mortgage warning: Over 800,000 homeowners 'in the dark' about interest rate shake-up that could lead to payment increases

A study by Barratt Homes highlights a significant knowledge gap among British homeowners regarding interest rates and their effect on mortgage payments.

Many homeowners are unprepared for potential payment hikes when their current deals expire. Government data also reveals that approximately 600,000 homeowners have a mortgage that "tracks" the Bank of England's rate, meaning any base rate change has an immediate impact on their monthly repayments.

Meanwhile, over 800,000 fixed-rate mortgages with a low interest rate are expected to expire this year, meaning their payments could also increase when their term ends.

Online searches about interest rates have surged, with a 5,000 per cent increase in queries about "what happens when interest rates are cut".

The survey also found that 43 per cent of homeowners are unsure of their current mortgage rate, and 16 per cent cannot distinguish between fixed-rate and adjustable-rate mortgages. This lack of understanding is especially concerning as many homeowners face the prospect of payment increases.

Variable rate mortgages can change based on market conditions, often tied to the Bank of England's base rate. Tracker mortgages directly follow the Bank of England's base rate, meaning any changes are immediately reflected in mortgage payments.

Fixed-rate mortgages lock in an interest rate for a set period, providing payment stability regardless of base rate fluctuations.

Terry Higgins, Managing Director of TNHG said: "When interest rates are low, borrowing is cheaper, which can make larger loans more appealing.

"But when rates rise, borrowing becomes more expensive, so individuals may need to adjust their loan size, increase the term, or consider a different mortgage to keep payments affordable.

"When interest rates are held, there is greater stability for buyers to make decisions about moving home, with outgoing payments easier to forecast and account for.

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He advises that switching to a mortgage with a lower interest rate can help homeowners reduce their monthly payments or shorten their loan term. This approach could potentially save thousands over the long run.

What constitutes a "good" interest rate varies by individual circumstances.

Higgins said: "In an ideal scenario, a good mortgage rate is one that's lower than the current market average.

"However, what constitutes a 'good' rate is different for everyone. It largely depends on your individual circumstances, like your credit score, the size of your deposit, and how long you're planning to stay in the property."

He offered several practical tips for securing better mortgage rates in the current climate.

He said: "Start by checking your credit report for any errors or outdated information that could be pulling your score down. Saving for a larger deposit can also help access better rates by reducing the loan-to-value ratio."

Savers should also aim to save at least 20 per cent of the property's value if they can. He recommends shopping around rather than accepting the first offer received.

Higgins added: "Don't settle for the first offer you receive. Take the time to compare rates from multiple lenders."

Getting pre-approved through a Mortgage in Principle can help secure a rate and demonstrate to sellers they're a serious buyer.

Timing one's application with an awareness of market trends can also lead to better outcomes.