Interest Rates Rise: How Will This Affect Your Mortgage?

Mortgages & Money

On December 2021, we saw interest rates rise to 0.25% by the Bank of England (BoE), having previously stated that “it will be necessary over the coming months” to raise interest rates if the Government’s goal of 2% is going to be achieved.

In March 2021, just as the pandemic struck, the BoE reduced rates to its current historic low of 0.1%. But how does this interest rates rise affect homebuyers?

Bank of England Base rate

The base interest rate (base rate) is set by the BoE and is a benchmark for the cost of borrowing money. Interest rates are the price of money, in other words. This is relevant to homeowners with mortgages because lenders use this benchmark rate to determine what they will charge for borrowing. Of course, this doesn’t only have an impact on mortgages; it affects lenders of credit cards and loan providers, too. It therefore follows that if the BOE base rate rises, the cost of borrowing will also rise.

Rising inflation

The rate of inflation affects everything we buy, which in turn affects everything we do. With rising energy costs and our weekly shop, we can all feel the pinch as prices continue to soar. Manufacturers and retailers have passed on rising costs to consumers, rising costs which include labour, transport, energy, and materials.

Higher inflation forces most household budgets to tighten. To help relieve the downward pressure of this tightening, the BoE aims to halve inflation to 2% by incrementally increasing interest rates.

What will increasing rates do to mortgages?

Depending on whether you have a fixed rate mortgage, an increase in rates could influence your monthly mortgage repayments. About 80% of homeowners choose a two-year fixed rate mortgage for added payment protection, and for these, any rate rise won’t have any impact on payment until you decide to remortgage.

For the remaining 20% or so that have a variable or tracker mortgage, or a fixed term that is about to expire, monthly expenses are certain to rise.

A tracker mortgage is like variable rate mortgages but which “track” the base rate – principally the BoE base rate. The tracker rate doesn’t match the rates they track but instead has a margin above that rate. For example, a base rate of 0.25% plus 1.00%. You can get longer tracker mortgages or even life-time tracker mortgages that cover the entire length of the mortgage term, both of which will have a higher margin.

A standard variable rate is the automatic position when fixed terms come to an end. These variable rates are typically higher than most other mortgage rates.

Anticipation of interest rate increase is already impacting mortgages

In anticipation of an imminent interest rate increase, many lenders have already started to increase their rates. In October, major lenders like Barclays, HSBC, and TSB all raised prices on some of their products.

For fixed interest rate mortgages, these are based on swap rates. As swap rates rise, as they have done in recent weeks, it is a strong indication that the market is preparing for a rate rise, and as a result, the funding costs for banks have increased. When this happens, it is factored into the mortgage rates offered by lenders. The good news is that there are still 2 & 5 year mortgage deals available floating around the 1% mark.

If you are on a tracker or variable mortgage and your mortgage has been affected, speaking to a mortgage adviser can help you decide what action to take to improve the situation. Shopping around for a deal on a fixed mortgage is one option, but there could be financial costs associated with redemption fees, negating the benefit of changing over. A mortgage adviser can go over all your options with you to help you find a solution based on your individual circumstances.

Looking ahead, if you have a fixed rate mortgage that is due to end in the next several months, you could look now and see what deals are available to secure you at a more favourable rate, before such deals become harder to find. It’s a good idea to get the ball rolling as soon as possible as the whole process takes time, allowing yourself at least six months before your current deal expires.

It’s worth bearing in mind that the more of your mortgage you have paid off, the more likely you will get a better deal.