What does the UK interest rate rise mean?
The Bank of England has approved an interest rate rise.
The Bank of England has raised interest rates to 0.75% in a bid to tackle rising inflation in the UK. That means the base rate is back to its pre-pandemic level. What does it mean for UK savers and borrowers?
Will my mortgage go up?
Only if you have a variable-rate mortgage, usually a tracker that follows the base rate or a standard variable-rate loan from a lender.
A follow-on mortgage will directly follow the base rate: The fine print on your mortgage will tell you how quickly the increase will pass through, but next month your payments will likely increase and the additional cost will fully reflect the base rate increase. On a tracker currently costing 2.25%, the interest rate would rise to 2.5%, adding £18 a month to a £150,000 mortgage over 20 years.
Some lenders move borrowers to rates explicitly linked to the base rate when their fixed rates come to an end. Santander, for example, has what it calls a tracking rate that borrowers who have signed deals since Jan. 23, 2018, spend at the end of their special offer. At the beginning of this month it went from 3.50% to 3.75% after the increase in the base rate in February, and now it stands at 4%. This means that since the beginning of December, monthly payments on a 20-year £150,000 mortgage have risen from £858 to £909.
With a standard variable rate, things are less straightforward: they can change at the lender’s discretion. Not all lenders approved the December hike, although they did move on the February hike. Some, like Nationwide and Halifax, have carried over both previous increases in full.
There’s no reason banks and building societies shouldn’t pass on the full increase, says David Hollingworth, broker at L&C Mortgages. “It makes sense for borrowers to brace for an increase in line with the base rate,” he says.
However, most borrowers have fixed rate mortgages and their payments will not change. Interest rates have been so low in recent years that locking in has been attractive, and as of 2019, 96% of new homeowner-renter mortgages have been taken out at fixed rates. In total, 74% of outstanding mortgages are fixed.
Several million homeowners are now mortgage-free, thanks to years of low rates and forced saving during closings.
What about new mortgages?
The sub-1% mortgage rates that made headlines last summer are a thing of the past, but new loans are still being made at rates that are historically low. However, some commentators think this will be over soon.
Andrew Wishart, UK economist at Capital Economics, says lenders have absorbed previous base rate increases into their profit margins, but he doesn’t think there is room for them to do more. “We expect a sharp increase in mortgage rates in the next 12 months,” he says. “Based on our forecast that the bank rate will rise to 1.25% by the end of the year and to 2.00% in 2023, the average rate on new mortgages will double from a low of 1.5% in November 2021 to almost 3.0% in 2023. ”
That would cause “house price and demand growth to slow to a crawl,” he says.
Currently, however, there is a wide gap between the cost of new offerings and lenders’ SVRs, so anyone paying a variable rate should consider moving. “Those borrowers who switch to a competitive fixed rate from an SVR could significantly lower their mortgage payments,” says Rachel Springall of data firm Moneyfacts. She says that on a £200,000 mortgage laid out over 25 years, going from an SVR of 4.61% to the two-year average fixed rate of 2.65% would save a borrower around £5,082 over two years.
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