How will rising UK interest rates affect you? | Interest rate


The Bank of England raised interest rates by 0.75 percentage points to 3% – the eighth increase since last December and the largest since 1989. So what does this mean for your finances?

How will this affect mortgage payments?

This will hit many of the roughly 2.2 million people who have adjustable rate mortgages hard, at a time when other costs are rising. Many now have to pay hundreds of extra pounds a year – and for some with larger loans it will be thousands.

About half of that 2.2 million are either on a tracker or a cut-rate deal. The other half pays the standard variable rate (SVR) of their lender.

A tracker tracks the base rate directly, so your payments will almost certainly soon reflect the full rise. On a previously 3.5% tracker, the interest rate would rise to 4.25%, adding £59 a month to a £150,000 repayment mortgage with 20 years remaining. If it were an interest-only mortgage, it would be £93 more per month.

SVRs change at the discretion of the lender, but most will increase, but not necessarily by 0.75 points. Some lenders may take a while to advertise what they are doing.

However, around 6.3 million UK mortgages (three quarters of the total) are fixed rate home loans. These borrowers are isolated until their agreements expire, but for many this will be in the next few weeks or months.

What about new mortgages?

It has been – and continues to be – a truly difficult time for anyone looking for a new fixed rate mortgage, whether to buy their first property or to replace a deal that is coming to an end.

The price of new patches had already increased, but really went up after Kwasi Kwarteng’s Disastrous Mini-Budget unleashed chaos on the financial markets. The average new two-year fixed-rate mortgage rose from 4.74% on September 23 to 6.65% on October 20.

However, over the past two weeks, some lenders have started cutting their new fixed rates, slowly bringing the new two-year average fixed rate down to 6.46% on Thursday, according to Moneyfacts.

The National Building Society announced some pretty big cuts: On Tuesday, it slashed rates on some products by up to 1.3 percentage points. However, to qualify, you must be an existing Nationwide mortgage borrower looking to switch to one of its new offerings.

Lenders had already forecast a sharp rise in rates, and it is money market “swap rates” – which have fallen in recent weeks – that largely determine the pricing of new fixed transactions.

All of this has led to the “strange phenomenon” of the base rate rising as new fixed rates hold steady or fall, said Sarah Coles of investment platform Hargreaves Lansdown.

Offers available on Thursday included a 5.43% two-year fix from Virgin Money for people looking to remortgage.

However, Chris Sykes, chief technical officer at brokerage Private Finance, said that as fixes still remain much more expensive, many borrowers who need a mortgage quickly might prefer a follow-on deal, especially a no-cost deal. prepayment scheme (ERC), as it offered greater flexibility. For example, HSBC currently has two-year trackers with no ERC starting from the base rate plus 0.69% – so 3.69% after the Bank’s hike.

What about those who are already struggling?

The UK latest financial data showed that the total number of customers in mortgage arrears continued to decline in the three months to the end of June. However, the number of properties mortgaged by repossessed owners increased by 5% compared to the previous quarter.

Cost of living pressures will clearly weigh more heavily in the months ahead. Nevertheless, estate agent JLL said this week that “banks currently have a low appetite for repossessions… It takes two years to repossess a house, and in the current cost of living crisis , this could be a difficult public profile position to adopt a repossession strategy.

The bottom line, experts say, is that provided someone engages with their lender and pays something, they are unlikely to face repossession. UK Finance said it was “always a last resort after all other options have been exhausted”.

Some believe that years of house price growth mean that the real estate market may be more resilient to a downturn than some would have expected. JLL analyzed data from the Bank of England and found that 62% of the UK’s 8.4 million mortgage homeowner households had at least 25% equity in their property, while only 0.2 %, or about 17,000, had less than 5% equity.

Will real estate prices go down?

One of the main drivers of house prices is how much people can borrow, so higher borrowing costs will have a big impact. Real estate website Zoopla said this week that the labor market remained strong and the supply of available homes was below average, creating a shortage that would support prices. But research from property tech firm iPlace Global claimed that 16% of homeowners plan to sell in the next year.

While plenty of recent data has painted a picture of a market continuing to defy gravity, Nationwide’s latest figures released on Tuesday suggest the tide is finally starting to turn. Britain’s biggest building society said UK property values fell for the first time in over a year last month, the average price of a home fell 0.9% from September – the biggest monthly drop since June 2020.

National Chief Financial Officer Chris Rhodes told MPs on Wednesday he had four far-reaching economic scenarios for what happens next, and “my best case is slowly increasing house prices, and my worst case is potentially a 30% drop” – although he added that these were “the two extremes”.

Zoopla said it believes the most likely outcome for 2023 is “a modest decline in property prices of up to 5%”. On Thursday, estate agent Savills predicted the average UK house price would fall by 10% in 2023, but start rising from 2024.

What about credit cards and loans?

The cost of borrowing is on the rise and in some cases has reached record highs, even as the soaring cost of living forces people to take on more debt and take out loans.

The Bank of England revealed this week that the effective interest rate on credit cards increased to 18.96% in September – the highest since records began.

Credit card rates vary but are usually not explicitly tied to the base rate.

Meanwhile, average personal loan rates for new applicants have also increased. However, most unsecured personal loans have fixed rates, so if you already have one, your monthly payment won’t change.

The reality is that the Bank’s consumer credit numbers don’t reflect the full picture, as they omit debts such as “buy now, pay later”, informal loans from family and friends and options of last resort such as loan sharks, said Laura Suter of the AJ Bell investment platform.

But is this good news for savers?

Savings rates are on the rise: there are a number of accounts paying around 5%, and that will go up after this latest interest rate decision.

As of Thursday morning, according to Moneyfacts, the highest rates available on easy access accounts included the 2.81% offered by Al Rayan Bank, while for a five-year fixed rate savings bond it was 5. 1% by Gatehouse Bank.

But even if the latest increase in the base rate is fully passed on, the inflation rate – currently 10.1% – erodes the value of people’s nest egg.

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