By agreeing to hold rates at their current level during August, the Bank of Englands Monetary Policy Committee (MPC) are undoubtedly waiting to see the impact the most recent increase will have on the nations spending.
Voting 6-3 last month in favour of raising interest rates, the fifth hike over the last twelve months saw the MPC become slightly more divided in their decision previous hikes have seen around an 8-1 or even a 9-0 majority vote for the proposed increase.
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High street sales since then have definitely slowed and there has been a corresponding slowdown in the manufacturing sector and a decline in house price inflation and mortgage approvals.
However those looking to make the most of this breathing space and shop around for a new mortgage deal might be in for a bit of a surprise as the most recent figures have shown it costs and average of £6,000 to get out of an existing fixed rate mortgage deal.
Early redemption penalties for leaving your fixed rate mortgage within the initial period in favour of another deal have been shown to vary very little, regardless of whether you choose to leave in your first, second or third year of the mortgage.
You may have plumped for fixed mortgage due to rising interest rates, but the old adage of what goes up must come down is now plaguing borrowers who are beginning to worry that their clever plan might see them losing out towards the end of their initial tie-in period.
The average get out fee is £6,631.55 in your first year, £6,225.57 in your second and £6,254.18 in your third. Lenders can choose to charge either a percentage of a customers total loan or an agreed number of monthly repayments as a fee for reneging on a fixed deal.
Sean Gardner, chief executive of MoneyExpert.com, said: Homeowners have been told to fix their mortgage deals since last summer as interest rates continue to rise, and lenders have obviously been keen to capitalise on this.
Choosing a fixed rate mortgage is a long-term commitment and a binding contract so lenders are well within their rights to charge you if you want out.
The key thing is to make sure you read the small print when signing up to a fixed deal. Redemption charges fees vary enormously and will also depend on the term you agree to lenders will be less happy if you leave a seven-year deal after 12 months than they will if you leave a two-year deal in your second year.
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With further rate rises not out of the question, we anticipate that even more homeowners will consider fixing before the year is out. So its important that people are aware of all the pitfalls as well as the benefits of fixed rate mortgages.
Now the average price of a property in Greater London has shot through the inheritance tax barrier, homeowners can enjoy their capital gains with the typical price sitting pretty at a huge £341,000. However a further rate rise to 6 per cent proves to take the edge off this as an interest-only mortgage of this size would cost £67 more a month, a huge £809 more each year.
John Porteous, director at BDO Stoy Hayward Investment Management puts this in perspective: For any higher rate taxpayers, they are going to have to earn around £1,348 a year more (gross) to maintain their existing lifestyle. Alternatively they could reduce their current spending by £809 a year – for some this might mean their pension contributions. If someone were to reduce personal pension contributions by £809 (net) a year from age 40 until retirement at 65, that would mean a potential loss of approximately £60,300 on their pension fund value, assuming a 6 per cent per annum growth rate, after charges, on the underlying investment.
“As interest rates have risen by 1.25 per cent since last August, a holder of a fixed rate mortgage of £341,000 moving onto a standard variable rate (say 6 per cent) or seeking to fix again (at 5.75 per cent) will see their monthly repayments increase by £407 or £339 per year respectively which for a higher rate tax payer would mean theyll have to earn an additional gross amount of either £8,134 or £6,786 to maintain their existing standard of living.
David Bexon, managing director of SmartNewHomes.com, added: Todays decision will come as a relief for the UKs homeowners following last months rise, however, with many predicting this years rate rises to reach 6 per cent by the autumn, this months reprieve could be short lived.
The market now needs to see a period of stabilsation rather than another increase and I would urge the MPC to think carefully, especially in light of the recent devastation caused by flooding and the introduction of HIPs, which has caused uncertainty across the market, before making next months decision.
Ian Kernohan, economist at RLAM echoed these thoughts, but also offered a ray of light to anxious borrowers, saying: Since the last set of minutes did not signal a burning desire on the part of the MPC to raise rates this month, todays news is not a major surprise. A move to 6 per cent is still on the cards, but given that the MPC now views monetary policy as being restrictive, a move beyond 6 per cent looks unlikely and there is a real possibility of a cut in Bank Rate next year, as the economy weakens.
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