The Bank of England raised interest rates on Thursday, November 2nd. This is the first increase since 2007, putting an end to a decade of record-low interest rates for UK borrowers. Rising from 0.25% to 0.5%, the hike in the base rate means that around 45 million savers can look forward to better returns from their savings account. At the same time, millions of homeowners with standard variable rate or tracker mortgages will face small increases in monthly payments.
With inflation sitting 2% above its target, and UK unemployment at a 42-year low, this increase was widely expected—despite slow growth and warnings from a number of experts who advised delaying the increase to avoid further risks to a poorly-performing economy. The Bank of England’s Monetary Policy Committee was also split on last week’s decision. Seven members of the MPC—including governor Mark Carney—voted in favour of the increase, but Sir Jon Cunliffe and Sir Dave Ramsden voted to keep rates at 0.25%.
Bank of England’s governor Mark Carney has previously mentioned that over the next 3 years we will only see a couple of small increases, that will be “gradual” and “limited”.
How will the interest rate rise affect you?
Standard Variable Rate and Tracker Mortgages
If you have a 25 year repayment mortgage and your rate raised by 0.25%, the increase in payments would be approximately as follows:
£100,000 mortgage – £10 per month increase
£150,000 mortgage – £16 per month increase
£200,000 mortgage – £22 per month increase
If you are on a tracker or variable rate mortgage and would like advice on whether there is a better deal for you, please contact our friendly team today.
In the UK, approximately 9.2 million homeowners have mortgages, around half of which are on a standard variable or tracker rate, which are directly linked to the Bank of England base rate. These households will be most affected by the decision to increase interest rates.
Many homeowners with variable rate and tracker mortgages tend to be older with relatively small outstanding balances, but there are a number of younger borrowers and first-time homeowners who selected this type of mortgage to take advantage of historically low interest rates with a view to paying off more in a shorter period of time.
Though disappointing, the increase for most homeowners should be relatively small and manageable.
Fixed Rate Mortgages
Around 4.5 million households in the UK have fixed rate mortgages, typically for periods of two or five years. 94% of new mortgage loans are on fixed interest rates. This is always a poplar choice for first-time buyers and borrowers who are remortgaging because it protects them from sudden and unexpected interest rate rises, ensuring their monthly payments stay the same for a certain period of time.
If you have a fixed-rate mortgage, you won’t see any immediate increase in your monthly payments. When you reach the end of your fixed-rate term, you may have higher monthly mortgage payments. However, there is also a chance that you could end up with a cheaper deal, depending on when you took out the mortgage. You should start planning ahead and shop around for the best mortgage deal when the time comes because your lender’s standard variable rate may be significantly more.
Future interest rate increases
The general consensus amongst experts is that another interest rate increase of 0.25% will be introduced next year. There is also the possibility of a second increase, which effectively means that the Bank of England base rate could rise to 1% in 2018. Long term, there is talk of interest rates being “normalised” after 10 years of record-low rates. This “new normal” is expected by the majority of mainstream economists to be little more than 3%.
Whilst this recent increase in interest rates is disappointing to borrowers, lenders are incredibly competitive (particularly with fixed-rate deals) and will likely become more so in light of the change.
If you are planning to buy your first home, remortgage, or invest in buy-to-let property, we strongly recommend—as always—speaking to an independent financial advisor like The Mortgage Hub for the most up-to-date impartial help and advice, ensuring you get the very best deal to suit your individual circumstances.
The Mortgage Hub is an independent mortgage advisor serving the greater Glasgow area. Whether you are planning to buy your very first home and need the right first time buyer mortgage, or are looking to re-mortgage due to a house move or to growing family – we understand your journey is so much more than a financial process, it’s a journey to achieve your dreams, improve your lifestyle and achieve your true potential.