What an interest rate hike could mean on your mortgage

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remember, remember the 4th of November. No, Bonfire Night does not take place on a day at the beginning of next month. But, if you own a home with a mortgage, this is still a date to note.

That’s because that’s when we next hear from the Bank of England (BoE) and its very influential Monetary Policy Committee (MPC) on interest rates.

If all nine MPC members voted in favor of an increase in the Bank of England’s base rate in November – say a quarter or half a percentage point – the decision would have an impact on the finances of the savers and borrowers.

For example, a rise in interest rates would push up savings rates.

This would be good news for savers, especially those with cash accounts that bring in paltry income. Rates as low as 0.01% are not uncommon today, even on deposits of £ 50,000 or more.

A rate hike, however, would be much less welcomed by anyone who has borrowed money, especially mortgage owners. This is because commercial lenders all take inspiration from fluctuations in the base rate.

Record low rate

The MPC last met in September, when it voted unanimously to keep the interest rate at 0.1%, the record high it reached at the start of the pandemic in 2020. .

The UK’s interest rate trajectory had already been on a downward curve in the decade leading up to Covid-19. The rates fell dramatically, from 5% to 0.5%, in the aftermath of the 2008 financial crisis. The rate again halved, from 0.5% to 0.25%, at the following the Brexit referendum in 2016.

However, after 18 months of the current floor rate, sentiment around financial markets is that a rate hike may be on the horizon, perhaps this side of Christmas.

According to broker Hargreaves Lansdown, “Rate hikes are now integrated into the market before the end of the year, due to a deluge of inflation warnings and indices from some of the BoE’s rate regulators” .

“Inevitable” rate hike

Commentators say worries about inflation, currently at 3.2% – more than a percentage point above the BoE’s 2% target – as well as positive employment figures, persuade also the markets that a rate hike is inevitable.

Countering those fears are the sluggish growth figures for the UK. A new set of pandemic protection measures, if introduced this winter, would also go some way to allay concerns about rising rates.

Assuming, however, that rates go up, if not in November, but maybe when the MPC makes its last interest rate announcement of the year in mid-December, what does that mean? for households with mortgage loans?

More expensive mortgages

Raising the base rate has a knock-on effect on the cost of mortgage loans, making mortgage payments more expensive.

Laura Suter, personal finance manager at brokerage AJ Bell, said: “While savers will welcome a BoE rate hike, anyone with a mortgage will ultimately see the hike trickle down to their mortgage costs.”

Winkworth, one of London’s largest estate agent chains, said: “Even a small rate hike can have a big effect on mortgage payments that follow the base rate… it makes a big difference to budgets. people.

Combined with a recent spike in UK inflation, not to mention the current turmoil in the UK energy market, the last thing mortgage customers need this winter is a more expensive home loan to manage in addition to the sharp increases in utility bills, fuel prices and the cost of the weekly store.

Finances at breaking point

The concern is that the combined effect could stretch household finances to the breaking point.

Ms Suter said, “It depends on the type of mortgage you have and the impact you will see. Mortgage rates have been low for a long time, and some homeowners who have bought in recent years have only experienced very low mortgage rates. A small change in the BoE won’t push rates up [but] homeowners need to be prepared for a rate hike.

Sarah Coles, Personal Finance Analyst at Hargreaves Lansdown, said: “Most mortgage deals are fixed right now, so most homeowners will be protected until their deal expires. The problem is that at this point customers may face a steep increase in costs.

“If you’re on a variable rate deal, your rate is likely to increase with any BoE change. So, you might want to consider making a fixed deal before any changes happen and while there are bargains. It’s worth getting a deal done as soon as possible, because when banks are convinced there are hikes, fixed mortgage rates will rise before any announcements are made. “

Shop now

Mortgage customers with less than six months to go on a fixed contract can start looking for a new home loan now. This is because lenders allow you to lock in a rate up to six months in advance.

It’s also worth exploring to what extent a rate hike might affect your future payments. This gives you some breathing space to plan how you could stretch your budget to cover a larger monthly payment, if you need it at the end of your current contract.

To help you out, we’ve asked Hargreaves Lansdown to produce numbers reflecting the impact of rising interest rates on typical mortgage payments.

The example tables below show two scenarios, one for a typical variable rate mortgage and one for a fixed rate arrangement.

Up

We assumed that the current 0.1% interest rate would rise to 0.25% in December 2021, then rise again, to 0.5%, in early 2022.

The figures assume a mortgage with 20 years to run for the average price of a house in London of £ 495,000.

Table 1 assumes an average variable rate mortgage of 2.32%, while Table 2 shows repayments based on an average fixed rate mortgage of 1.99%.

The two rates reflect the average rates on the housing stock in circulation. In other words, the rates that homeowners currently have, rather than the average rates available on new loans.

According to the figures, monthly mortgage payments could be up to £ 88 per month higher next spring.

Ms Coles said: ‘The gradual rate of change might lull owners into a false sense of security as it might not seem too difficult to find £ 33 more in the monthly budget. However, the cumulative effect of rate hikes can be devastating, and in a few months, if your mortgage payments are £ 88 higher, life could be a lot more difficult financially.

Table 1: example of mortgage repayments, assumed variable rate of 2.32%

Mortgage size

£ 450,000

£ 400,000

£ 300,000

£ 200,000

Current monthly mortgage payment / £

2 345

2,085

1,564

1,042

Monthly payment and increase / £ assuming 0.15 percentage point increase

2 378 (+33)

2 114 (+29)

1,585 (+21)

1,057 (+15)

Monthly payment and increase / £ assuming 0.4 percentage point increase

2 433 (+88)

2 163 (+78)

1,622 (+58)

1 081 (+39)

Table 2: example of mortgage payments, assumed fixed rate of 1.99%

Mortgage size

£ 450,000

£ 400,000

£ 300.00

£ 200,000

Current monthly mortgage payment / £

2 274

2,022

1,516

1,011

Monthly payment and increase / £ assuming 0.15 percentage point increase

2 306 (+32)

2,050 (+28)

1,538 (+22)

1,025 (+14)

Monthly payment and increase / £ assuming 0.4 percentage point increase

2 361 (+87)

2,098 (+76)

1,552 (+36)

1,035 (+24)

Source: Hargreaves Lansdown


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