Interest rate rises and mortgages

ended 22. October 2021

The Bank of England is increasingly making noises that rates could rise before Christmas in a bid to contain spiralling inflation. We asked brokers what this could mean for mortgage holders.
 



 

7 responses from the Newspage community

Star Quote
"The base rate and mortgage interest rates are not nearly as linked as the public believe. Remember last year when the Bank of England dropped the base rate to 0.1%, the lowest rate ever, well mortgage interest rates actually increased, especially at high loan to values. There's been talk of the base rate going up for months now but mortgage interest rates on fixed deals just kept falling and falling. Even if rates did increase slightly, it would probably be seen as a correction to what will still be very low interest rates for homeowners."
Star Quote
"For most mortgage holders on fixed rates, any rise in the base rate won't affect them; that's the whole point of a fixed rate. Those languishing on their current lender's standard variable rate are already paying over the odds and if the Bank does raise the base rate it'll likely mean this filters through to mortgage rates in general. Instead, they should look to chat with a broker, ideally one with a large powerful beard, to lock in a better deal, given that rates are at historic lows for the moment. It's clearly going to be a rocky few years. A bit of planning around what is for most people their biggest debt, attached to their most valuable asset, will pay dividends as we negotiate the economic storms on the horizon."
"While I hope that the Bank of England hold its nerve on interest rates, at least until the 2022 numbers start to come in, it is not a huge issue for personal borrowers. The vast majority of people with mortgages have taken them out on a fixed rate basis. So if there was an increase in interest rates, most households would be insulated from the rise, unless they happened to be reviewing their mortgage in the very near future, or had any part of their borrowing on a variable rate mortgage (such as a discounted, or tracker rate). Commercial loans and mortgages however are more likely to be on a variable rate, so any increase in the base rate will most likely be passed on to them straightaway."
"Some of the lowest ever mortgage rates have gone up over the past few days but there is still a range of sub-1% fixed rates to choose from. Even if the Bank of England raises the cost of borrowing, we will still be in an ultra-low borrowing environment. If you are in the process of taking a mortgage or you are thinking about remortgaging it is a good time to secure a new deal. This month (October) has been the biggest month for remortgage maturities of 2021, with £38.9bn of fixed and tracker rates expiring. If you delay choosing a new deal there is a good chance you will end up paying more money."
Rates are likely to rise in the near future but the impact of a rate rise will only impact certain people. Those that are in a fixed rate period at the moment will be unaffected by rate rises until that fixed period ends and those that are within 6 months of their deal ending can lock in a new rate now for when they switch over, so in theory a rate rise should only start having an impact on existing borrowers from 6 months time onwards. Whilst a rate rise has obvious consequences of higher interest payments many borrowers will be in a lower loan to value bracket when they remortgage so will have access to better products than when they took their current deal. Secondly, there is sometimes the option to increase the term of the mortgage to reduce the payments if they become unaffordable but this should only be done if necessary as it will mean paying more interest in the long run.
"It seems likely that rates will increase, and we have seen a few lenders slightly increase their mortgage rates in the last week. If rates increase it would have an impact for all mortgage holders. Those with a larger mortgages would be affected more as a small percentage increase makes a big difference at the higher level, especially when you have a loan above £1m."
There is a lot of speculation regarding a potential rise in interest rates and the impact this will have for mortgage holders. Some believe that raising rates now would be the wrong thing to do - inflationary pressures relate to the choked up supply chain and are therefore likely to drop away once the supply issues are resolved. Others believe that the spectre of inflation is too great to ignore and the Bank of England should act now. In any event this creates uncertainly. For many current mortgage holders who have recently locked themselves into a fixed rate there isn't anything to worry about for now. Indeed those who have locked themselves into a sub 1% rate may even be smugly thinking how good they have been. But for others who may be on a lenders variable rate, be it a tracker or SVR they may be worried about the impact of a rate rise on their finances. especially with other prices also rising. And for those coming to the end of a fixed rate now is probably the time to fix their new rate rather than to wait too long.