How to Prepare for the Impending Mortgage Rate Rise
5 minute read
At the beginning of November, the Bank of England’s Monetary Policy Committee voted to increase the base rate from 0.25% to 0.5%. This is significant, but it could also be argued that the “rate panic” headlines that heralded the announcement in many newspapers verged on sensationalism. In this blog we’ll look at the context of the interest rate rise, what it means for borrowers, and look at ways to prepare for increasing interest rates.
Background to the interest rate increase
With the Bank of England base rate increasing by 0.25%, and the potential for further rate rises in the future, it’s not unreasonable that borrowers might be concerned about this latest news. However, it’s important to look at the base rate in the historical context of the past decade or so. When the first wave of the global financial crisis hit the UK in 2008, the Bank of England base rate was 5%. In response to the economic pressures brought about by the crisis, the interest rate was slashed each month from October 2008, finally dropping to 0.5% by March 2009 – this was the lowest interest rates had fallen since the Bank of England was founded in 1694.
The base rate remained at 0.5% for over seven years, before being cut again to 0.25% as an emergency measure in August 2016 in response to a sharp drop in the value of the pound following the Brexit referendum. The rate is rising now in an attempt to combat Brexit-related inflation. This latest rate hike is the first time the base rate has been increased since July 2007; however, it’s worth remembering that we are still – for now – in a period of historically low rates.
Should you worry about the rate hike?
This very much depends on the type of mortgage product you have, and how long your current mortgage deal has to run. Let’s first consider borrowers whose mortgages are on the lender’s Standard Variable Rate (SVR), or discounted schemes that offer a reduction to this rate. While SVRs usually aren’t explicitly linked to the Bank of England base rate, if the base rate goes up by 0.25% then it’s a pretty safe bet that most lenders will match the increase. The good news for those borrowers sitting on the lenders SVR is that in most cases you will be able to save money by either moving onto a different mortgage product with the same lender, or by remortgaging to new deal with a different provider. This may not be the case should it be a discounted scheme so do check your mortgage terms before making any decisions.
Most tracker mortgages are linked to the Bank of England base rate. That means that if the base rate goes up, your mortgage interest rate will go up by the same amount, therefore increasing your monthly payments. The latest rate rise was 0.25%, so for example an interest-only tracker mortgage with £150,000 outstanding would cost an extra £375 per year, or £31.25 per month. For some people, the higher monthly payment might be easily absorbable into their disposable income, but for others, a mortgage price rise might be more difficult to afford.
If you are on a fixed-rate mortgage, then you don’t need to worry about the recent rate hike affecting your mortgage payments right now. However, it still makes good sense to consider your options and whether it might be to your advantage to move to a different mortgage deal. This is especially true if you are nearing the end of your current deal and aren’t tied in with early repayment charges; some lenders have already withdrawn some of their cheaper fixed-rate deals in response to the rate increase, and it is possible that fixed-rate products will become more pricey in the short term as demand for them increases.
How can I protect myself against rate increases?
For borrowers with variable, tracker or discount mortgages, the obvious answer would be to move to a fixed-rate mortgage, either with your existing lender or by remortgaging to a new lender to get the best possible deal. However, as in any financial decision, it’s important to add up the pros and cons – and costs – of changing your mortgage.
A first consideration is whether your current mortgage product imposes an early repayment charge for coming out of the deal early; this information should be on your original mortgage offer, as well as on your annual mortgage statement. Early repayment charges can be in the order of hundreds or even thousands of pounds, so you should give careful consideration as to whether the immediate costs of remortgaging – which could also include an arrangement fee for the new mortgage, survey costs and solicitors’ fees – will be offset by the potential savings of moving to a new fixed-rate mortgage and locking in your payments against future changes to the base rate.
Another question is how long to fix for. Fixed-rate mortgage deals are typically offered as short-term (two- or three-year), medium-term (five-year) and long-term (ten-year) products, and there can be pros and cons to each. Short-term deals tend to offer the best rates but this alone does not necessarily mean they are the best option for you.
The majority of people remortgaging to a new lender are currently opting for five-year fixed-rate deals; according to conveyancing firm Legal Marketing Services, five-year fixed rates accounted for 42% of all remortgages in October – that compares to just 21% who chose a two-year fixed rate.
A ten-year fixed rate might be appropriate for some, and there are some good long-term deals currently on the market. However, it’s worth remembering that the security of such a long-term product is in many cases offset by a lack of flexibility, as such deals usually tie you in to the mortgage with early repayment charges for the entirety of the ten-year term.