Fri 15 Oct 2021

How will rising interest rates affect your mortgage?

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Fix now to protect against imminent rate increases

Interest rates may have been held at record-low levels since the start of the pandemic, but this is unlikely to remain the case. Rising inflation and increased costs on everything from petrol to supermarket shopping means that the Bank of England may need to increase the bank rate in 2022. What does this mean, and why does it matter to homeowners?

Understanding bank rate

The Bank of England’s bank rate, formerly known as its base rate, acts as a benchmark for lenders when they’re choosing the interest rates to offer to borrowers with some products directly tied to the bank rate. Essentially, the lower the bank rate, the lower the interest rates. Therefore, if the bank rate needs to be raised, then mortgage rates will also increase.

At the beginning of 2020, the bank rate was 0.75% but was subsequently lowered to 0.1% in March 2020 to help contain the economic shock of the pandemic. This was reviewed in September and held at the same rate. Our estate agents in Loughton tell us that anyone taking out a new mortgage during this time has had an excellent range of products to choose from – for buyers with equity or a deposit of 40%, there have been 0.8% mortgages available on fixed 2-year deals, or 0.9% for fixed 5-year deals. Buyers with only a 10% deposit or equity have been offered a slightly higher rate of around 1.8% for 2-year deals, rising to 2.5% for 5-year deals. In comparison, the bank rate was 17% in 1979 and was still as high as 10.375% in 1991.

What does this mean for homeowners?

Unless you’re on a fixed deal already, then it’s likely that the cost of your mortgage will go up, which you’ll notice in the rising cost of your monthly repayments as the amount of interest you pay will go up. It’s expected that rates won’t rise until next year, but predictions are that the bank rate will be 0.5% by early 2022 and edging back up to 0.75% or even 1% by the end of next year.

The amount that your monthly repayments will increase by depends on how much you’re borrowing and the rate you secure on your deal. To give you an example, a £500,000 mortgage at a 1% interest rate over a 25-year term will cost £1,883 per month. If the interest rate rises to 1.5%, then your monthly cost will be £2,000 or £2,120 at a 2% rate.

If you’re hoping to remortgage, or buy a property in the next few months, then now is a great time to start looking and secure your mortgage deal. Remember that many mortgage offers will be valid for six months, so the sooner you can secure your finance the better. If possible, opting for a five-year deal would be a shrewd way to protect yourself against the likely future hikes that could occur in the next few years. However, if you already have a mortgage in place and are planning to switch early, be aware of your early repayment fees and penalty clauses which can negate any savings you might make by fixing.

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