What’s the impact on your mortgage?
Interest rates have been raised to 4% today as the Bank of England continues its attempts to bring down inflation. But how will this impact your mortgage? Whether you are on a tracker deal, a fixed-rate or about to step on to property ladder we’ve got the lowdown
It’s happened again – for the 10th time since December 2021, the Bank of England has increased the base rate as it attempts to get inflation under control and bring it down from 10.5% to the target, 2%.
The decision to raise the rate by 0.5% from 3.5% to 4% was backed by seven members of the central bank’s Monetary Policy Committee (MPC). The two remaining members wanted interest rates to stay at 3.5%.
As did the many homeowners in the UK who are now facing increased repayments on their mortgage as a consequence of today’s decision.
‘Unwelcome news for many homeowners’ was how Paul Broadhead, head of mortgage & housing policy at the Building Societies Association (BSA) described today’s hike.
Meanwhile, Danni Hewson, a financial analyst at AJ Bell likened it to a ‘foul tasting medicine’ – albeit a dose seen as necessary by the majority of the MPC.
To say it’s gone down like a tonne of bricks is probably an understatement.
However, if you are homeowner with a mortgage or, perhaps, a first-time buyer hoping to join their realms, you may well be wondering what today’s rate hike means, exactly, for you.
Because, whilst a rate rise looks dramatic on paper (or online) there can be a different picture when applied to your own situation.
What the rate rise means….
…if you are a homeowner with a tracker mortgage
Tracker mortgages, as per the name, track the base rate so today’s hike will mean an immediate rise in your rate. If you have a mortgage which tracks base rate plus 1% you’ll now be paying 5%.
When you consider the average two-year fixed rate is 5.44% according to Moneyfacts.co.uk this isn’t too harsh.
However, fixed rates are coming down so you could find this may not stay competitive for long.
Hewson said: “For someone with £250,000 of borrowing, a 0.5% rise means an extra £72 a month in costs. At £400,0000 of borrowing that rises to an extra £115 a month or £1,380 a year.”
So, what should you do if you are on a tracker and worried about further rate rises?
Alice Haine, personal finance analyst at Bestinvest, said: “With interest rates still likely to rise again from here, tracker repayments may nudge up again in the short term. Taking advice from an independent mortgage broker will identify the best path for a borrower’s finances.”
…if you are on a fixed-rate and not due to remortgage for a while
Your rate is fixed until your mortgage expires, so provided you are happy with your rate, it’s a good place to be.
Keep an eye on the base rate though so you are prepared when the time comes to remortgage. Some lenders allow you to apply for mortgage deals six months before the start date. If you have any concerns or questions you can always speak to a broker at any time.
Haine has an additional tip for anyone in this situation. She said: “The lucky ones in all of this are homeowners that locked in longer fixes in 2021, such as a two- or five-year product, before the rate hiking cycle began.
“They can relax for now but with property prices on the slide as demand eases off, it might be wise to overpay to protect against the downturn which can negatively impact a borrower’s loan-to-value band.”
…if you are on a fixed-rate and due to remortgage soon
It’s likely, if your current fixed deal is due to end, you are on a low rate. This is especially pertinent if you are on a two-year fix, as you will have secured your deal during the period of time when interest rates were 0.1% and mortgage rates were low too.
So, coming back into a market where mortgage rates have risen – thanks to rising interest rates and the fallout from the mini-Budget – may be a bit of a shock.
It is understood there are around 1.4 million homeowners with a fixed-rate product expiring this year.
The good news for anyone among this number is that rates are nowhere near as high as they were in the Autumn just after the mini-Budget chaos.
Hewson said: “The question many homeowners have been asking is whether they should hold off re-fixing until rates come down and instead go for a variable rate or a tracker mortgage.
“Every situation will be different, so the best course of action will be to talk to a broker to get the right advice for you.”
Indeed, if you don’t switch to a new deal, you will default to your lender’s standard variable rate (SVR). According to Moneyfacts.co.uk, the average variable rate today is 6.84% which compares to 5.44% for the average two-year fixed deal.
Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Borrowers coming off their fixed rate deal will be disappointed to see this latest rise to the Bank of England base rate, particularly if they plan to sit on their standard variable revert rate over the shorter-term in hopes that fixed rates will come down before they refinance.”
…if you are on a standard variable rete (SVR)
Whether you are currently sitting on your variable rate or considering reverting to this instead of remortgaging when your deal expires, you’ll be keen to learn how today’s 0.5% base rate hike will impact it.
Unlike tracker deals, SVRs don’t loyally follow the base rate – so you’ll just have to wait and see what your lender decides to do.
Springall said: “Lenders tend to pass base rate rises onto SVRs within a few months and a rise of 0.50% on the current average SVR of 6.84% would add approximately £1,536* onto total repayments over two years.”
If you are unsure how to proceed or what the best option is for you, a broker is a good place to gain advice and guidance.
|Mortgage market analysis|
|Average mortgage rates||Feb-18||Feb-21||Dec-21||Feb-22||Jan-23||Feb-23|
|Standard variable rate (SVR)||4.75%||4.41%||4.40%||4.46%||6.64%||6.84%|
|Two-year fixed mortgage||2.35%||2.53%||2.34%||2.44%||5.79%||5.44%|
|Five-year fixed mortgage||2.84%||2.73%||2.64%||2.71%||5.63%||5.20%|
|10-year fixed mortgage||2.96%||2.85%||2.97%||2.85%||5.47%||5.34%|
|Average rates shown are as at the first available day of the month, unless stated otherwise. Source: Moneyfacts.co.uk|
…if you are a first-time buyer
It’s bad enough negotiating those first steps on the property ladder as it is, without interest rates rising at every opportunity.
On the plus side, savings rates are benefiting – in general – from the increases to base rate. The average easy access savings account has increased it’s interest rate from 0.48% to 1.73% since February 2018.
House prices are also starting to fall, which is certainly a bonus if you are hoping to purchase a property.
But is this enough to counter the rising interest rates and housing supply shortages?
Paul Broadhead of the BSA said today’s hike was likely to worsen affordability problems. He said: “For first time homebuyers, the rate rises are having an immediate impact as the higher cost of a mortgage, alongside the rising cost of living, will affect their overall affordability.
“Although house prices have started to fall, they may still need to lower their ambitions as they’re unlikely to be able to borrow at the level they might have achieved 12 months ago.”
Springall said: “First-time buyers with a limited deposit may put their plans on hold until they can more comfortably afford to take out a mortgage. New buyers play a crucial role in keeping the market moving, but it would be understandable to see caution when affordable housing is in such short supply.”