Interest Rates and Your Finances

Following the May rise in interest rates to 4.5%, many people are now wondering what that means for their mortgages.

Lenders regularly review the interest rates of their mortgage products, adjusting the deals available to those looking to buy their first home or remortgage their existing property.

The Bank of England (BoE) meets every six weeks to decide whether the Base Rate should go up or down or stay the same. Last month, the interest rate went up 0.25% percentage points, from 4.25% to 4.5%.

What does the interest rate increase mean for your mortgage payments?

This rate rise is unwelcome news for those with a mortgage on a variable rate – this could be a base rate tracker, discounted-rate deal, or a lender’s standard variable rate (SVR).

For those on a tracker mortgage, their deal directly follows the base rate, and at 5.25%, their repayments will rise by £21 per month if they have a £150k repayment mortgage with a 20-year term. Compare this to last year; that same homeowner will have been paying £776 a month, indicating a rise in the previous 12 months.

A Standard Variable Rate mortgage goes up at the lender’s discretion. However, these are likely to go up even if not by the total 0.25% percentage points.

For those on a fixed-rate mortgage, this news will not impact their mortgage repayments each month. This accounts for around six million households in the UK – but if their current deal is about to end, they will feel the impact of the increase in their monthly payments. If they are coming to the end of a 2-year fixed rate, they could be used to paying around 1.5 to 2% and will experience a big jump.

US investment group Goldman Sachs anticipates rates will rise to 5% this summer.

Mortgage rates are increasing by an average of 0.39% across all LTVs, and these latest interest rate changes hardest hit those with a 10 or 15% deposit. However, some lenders are trying to remain as competitive as they can.

What does the increased interest rate mean for savings rates?

 The Bank began raising interest rates at the end of 2021, and at this time, the best easy-access savings rate was 0.67%. Following the rate rises, the rates for savers have improved, and the highest easy access savings rate is now 3.71% – this is significantly below the inflation rate of around 10%. Following the recent rate rise, several savings providers have raised rates to be competitive and attract new customers.

For those who don’t need an easy access account, rates of 4.91% are available – but this means tying up funds for two to five years.

The Commons Treasury select committee has recently campaigned to encourage high street banks to increase the savings rates offered to loyal customers. While the online accounts above pay relatively attractive interest rates, easy-access accounts at many big banks still provide meagre returns.

How does the increased interest rate affect credit card and loans?

When interest rates go up, so do the rates on borrowing via credit cards and loans. If you already have a loan, it’s likely to be on a fixed rate, so your repayment won’t change. If you have a credit card, it may be worth moving it to an interest-free offer. However, you will need to pay a transfer fee.

Are house prices falling as a result of the increased interest rate?

According to the latest House Price Index from Zoopla, buyers and sellers are pressing ahead with their plans despite the rate rise. Recent inflation figures might still put a brake on market activity however.

The Index shows that:

• UK house prices have dropped 1.3% over the last two quarters but this is now a slow reduction.
• Lower mortgage rates in the first half of this year supported an increase in housing market activity.
• Confidence is improving.
• Housing market conditions vary across the country with weaker demand in areas where house prices have risen the most.
• The likelihood of further interest rate rises may weaken demand and market activity at the end of 2023.

House prices are currently falling slower than they did at the end of last year, indicating some improved confidence from both buyers and sellers. In fact, the number of property sales in the UK has increased due to lower mortgage rates over recent months. The strong labour market has also prevented prices from falling further.

The annual rate of house price growth is 1.9% for the UK – down from 9.6% last year – ranging from -0.2% in London to 3.6% in Wales. House prices are expected to remain broadly the same for the rest of the year despite inflation data currently being higher than predicted. Mortgage rates could rise in the coming months which will impact house prices.

Looking for more information/ mortgage advice?

If you want to know how the recent interest rate rise might affect you, talk to the team at The Mortgage Hub. We can help you with your new mortgage or find a deal if you are coming to the end of your existing deal.