The financial markets are expecting interest rates to go up to 0.5% on Thursday, when the BoE’s Monetary Policy Committee meets. And experts predict they will hit 1% by the summer and 1.25% by the end of the year.
Borrowers on variable rates – tracker mortgages and standard variable rates (SVR) – are likely to be affected by the predicted rise. Anyone due to remortgage may also find the deals on offer have a slightly higher rate too.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Borrowers on variable rate mortgages can expect the rise to be passed on swiftly, and those who are remortgaging to a new fixed rate will feel the pain too.
“The first of the rate rises came hot on the heels of the last hike, and have been feeding through into mortgage deals ever since.”
The Bank of England reduced its base rate to a low of 0.1% at the start of pandemic and mortgage rates have been similarly low for some time. But in December, in response to rising inflation, the BoE hiked its rate by 0.15% to 0.25%.
Just before this, in the midst of speculation rates would increase, mortgage lenders began increasing rates on some fixed rate deals. And data released in early January confirmed lenders had already begun passing on the BoE rate rise to customers.
Sarah added: “The Bank’s aim is to raise rates slowly and steadily, so we don’t get any nasty surprises. However, this doesn’t really have the same impact if we’ve fixed our mortgages for years, because we’ll face the consequences of all these rises at once.
“So, for example, if someone currently paying 1% on a £200,000 mortgage over 25 years remortgaged at the end of the fixed period to a new deal costing 2%, it could push up their monthly costs by £94.”
Cost of living crisis
Whilst base rate increases are aimed at combating inflation, it is feared a rise in interest rates for mortgage borrowers will add further pressure to household finances.
Sarah added: “The idea behind rate rises is to ease inflation and alleviate the cost-of-living crisis, but for anyone facing a horrible combination of higher mortgage payments and rising taxes, it could do the precise opposite.”
BoE may hold off…?
Not everyone thinks a rise is on the cards on Thursday. Indeed savings expert, Kevin Mountford, said: “I suspect that any further rise in base rate might not happen until March or April. This said, the latest inflation figures see us at a 30-year high figure of 5.4% and this means the rate rise decision remains in the balance.
“This would ease some pressure on borrowers as the big banks were quick to pass on the last rate rise, and no doubt would follow suit if a further base rate rise was announced.”
What can you do?
If you are due to remortgage in the next few months it could be worth looking into deals now before rates go up further.
Laura Suter, head of personal finance at AJ Bell, said: “One option is to fix your mortgage now, so you lock in current rates and avoid an interest rate rise.”
She added: “Someone with £250,000 of borrowing on the average variable rate mortgage now could save £2,124 a year by switching to the current top two-year fix. If rates rise to 0.5% they would save £2,892 a year. If someone wanted to switch for longer they’d save less each year, but more over the term of the fix.”
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