What should you do when experts predict a rate rise?
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What should you do when experts predict a rate rise?

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Carl Shave Carl Shave | March 21, 2018

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Some banking industry analysts have recently predicted that the Bank of England could be raising its bank rates as early as May 2018, potentially increasing the base rate from its current level of 0.50% to 0.75% – its highest level in nine years. When a base rate hike is predicted, it’s common for financial commentators and the broader media to start warning mortgage customers to “act now or risk paying more”. In this blog we’ll take a look at how a 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 to you after a base rate increase will almost definitely be more expensive than those available should you choose to remortgage before a rate rise. A primary consideration will be whether you are tied in to your current deal with an early repayment charge (see below).

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 other 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 a potential interest rate hike, give Just Mortgage Brokers a call today on 0808 163 9224 to discuss your mortgage options.