Interest Rate Rise: What Does It Mean for Your Mortgage?
4 minute read
Following widespread speculation, the Bank of England has taken the decision to raise interest rates from 0.5% to 0.75%, the highest level they have been since May 2009. The increase is likely to lead to higher interest payments for more than three and a half million variable or tracker mortgages, which are tied to the Bank of England’s base rate. In this blog, we’ll take a look at how the rate increase could affect various types of mortgage, and discuss what action you should consider taking.
What type of mortgage do you have?
If you currently have a fixed-rate mortgage product, your interest rate – and monthly payments – will not be affected by a change in central bank rates. However, it may still be worth considering how long your mortgage deal has left to run. If it expires in just a few months’ time, the mortgage products available will almost definitely be more expensive than those that would have been available prior to the rate rise. That means it’s worth shopping around and utilising the expertise of a specialist mortgage broker to ensure you get the best possible deal.
For most borrowers with tracker or discounted rate mortgages, their mortgage interest rate will likely increase by the amount of the Bank of England’s rate increase, putting up monthly payments in line with the hike. While the vast majority of tracker products explicitly track the Bank of England base rate, some may track another rate, such as the lender’s own standard variable rate or LIBOR. In these cases, there is a possibility that the mortgage rate increase could be more, or less, than the Bank of England rate change.
If you have previously been on a fixed-rate, tracker or another type of deal that has come to an end, you will most likely be on your lender’s standard variable rate. Although standard variable rates aren’t generally linked to the Bank of England base rate in the way that most tracker mortgages are, most lenders do normally increase or decrease their standard variable rate broadly in line with base rate changes – which means that if the base rate does increase, your mortgage payments will go up.
If you do have a standard variable rate mortgage, you may be able to avoid the impact of a rate increase by either switching to an alternative mortgage product with your existing lender or by remortgaging to a new deal with a different provider.
What action should you take?
For borrowers with any type of mortgage, an important first step is to establish whether your existing mortgage has penalties for switching, in the form of early repayment charges. This information should be in your original mortgage offer, and on your annual mortgage statements. Early repayment charges can add hundreds or even thousands of pounds to the cost of remortgaging, so it’s important to understand whether any applicable early repayment charge will make doing so prohibitively expensive. If the early repayment charge is relatively small, then in some cases it can still be worth remortgaging, as in the longer term you might save more by switching to a better interest rate, than you will be charged for getting out of your existing deal.
If you do decide to consider remortgaging, give careful consideration to the type of mortgage deal you are looking for, and how long you want it to last. Are you willing to opt for a tracker or other variable rate, with the risk that future base rate hikes could mean your mortgage payments going up? Or would you rather go for the stability of a fixed rate, knowing that your payments will stay the same for the next two, three, five or even ten years?
While it’s possible to explore remortgage options by carrying out your own research, or using a financial comparison website, speaking to an impartial mortgage broker can give you access to the widest possible range of mortgage options, including deals that aren’t available on the high street. If you are concerned about your mortgage payments being affected by the interest rate hike, give Just Mortgage Brokers a call today on 0808 163 9224 to discuss your mortgage options.