The Bank of England has raised interest rates for the first time in more than 10 years to 0.50%.
Millions of borrowers will see their interest rate go up immediately, whilst those signing up for new mortgages will also have to pay more.
In anticipation of a rate rise, many lenders have already increased their mortgage rates.
However, the increase in the Bank Rate will not necessarily translate into higher mortgage rates for all borrowers.
The extent to which borrowers see an interest rate change will largely depend on the type of mortgage they have and whether it is tied to the base rate.
Around half of the UK’s 11 million mortgage borrowers are on fixed mortgages, while the other half are on variable rates.
The biggest losers of an interest rate rise are likely to be those on variable rates.
Some variable rates track the base rate, while others do not. For those that do not, any changes will be up to the individual lender as the Bank Rate is one of a number of factors taken into consideration when determining the mortgage lending rate.
David Hollingworth of L&C Mortgages said: “Those on variable rates are of course the most vulnerable to a rate rise and they should expect to see their monthly payments lift.
“That could put a further squeeze on monthly household budgeting which has felt the pinch of higher inflation feeding through.”
The 1.5 million borrowers with tracker mortgages – which automatically follow changes in the base rate – will also see their monthly mortgage payments go up accordingly.
Those already on a fixed interest rate will not see any change until they renew. However, borrowers looking to take out a new fixed deal should expect to pay more.
According to the Nationwide Building Society, a 0.25% rise in interest rates would see the payment on a £250,000 mortgage go up by £34.03 a month, or 408.36 a year.
This is based on a term of 20 years and an increase in variable rate from 4.56% to 4.81%.
Samuel Tombs, chief economist at Pantheon Macroeconomics, warned that mortgage rates would likely rise sharply in March when the Bank of England’s Term Funding Scheme ends.
The scheme was launched in the wake of last year’s Brexit vote to boost lending and slash the cost of funding for banks.
Tombs said: “Mortgage rates likely will rise sharply in March, when new lending will no longer create drawing rights for banks from the Bank of England’s Term Funding Scheme.
“As a result, we think that the average interest rate on a five-year fixed-rate mortgage will rise by about 0.50% over the next six months.”
Should you remortgage?
Many experts are advising borrowers to fix their mortgage to guard against any future rate rises.
Hollingworth said: “Worrying about what a lender will do with their standard variable rate can be something of a red herring considering how competitive mortgage rates are for those that shop around. In our experience at least 90% of borrowers have been fixing in recent years.
“Those that have so far failed to take advantage of the record low fixed deals will find that rates have already edged up as expectation of a rate rise increased. Nonetheless borrowers can make big savings over a standard variable rate and also protect against any future rate rises.”
Rachel Springall, finance expert at Moneyfacts, said: “Any increase to the Bank base rate will further fuel the fire of rises and borrowers who are concerned would be wise to consider fixing their mortgage before the best rates disappear.”
Jonathan Harris, director of mortgage broker Anderson Harris, said: “A rate rise will encourage more people to remortgage, as there is nothing like higher monthly mortgage payments to really focus the mind.
“There may be some borrowers who believe they are mortgage prisoners, unable to mortgage, but it is worth checking whether that is the case, particularly if you are on your lender’s standard variable rate and paying over the odds.”
First-time buyers
With lenders hiking rates across the board the era of record-low mortgage deals now appears to be over.
Many providers are looking to remain competitive to those remortgaging and protect their mortgage books by keeping rates low.
First-time buyers – who usually have smaller deposits – have been hit the hardest and are now facing higher interest rates than borrowers with larger deposits or looking to remortgage.
According to research from Moneyfacts, the average two-year fixed mortgage for someone with a 5% deposit has gone up from 4.16% in the past month to 4.26%.
By comparison, borrowers with a 40% deposit have seen rates rise from 1.66% to 1.69% over the same period.
Springhall said that first-time buyers should not feel too disheartened at the rise as they still have an abundance of deals to choose from in the market for various deposits.
“They will however, need to reassess their finances, as a more expensive mortgage will eat into their monthly income,” she said.
Buy-to-let
As most buy-to-let loans are interest-only rather than repayment mortgages, landlords are likely to end up paying even more as a result of a hike in rates.
Whereas a 0.25% increase on a £250,000 loan will push up monthly payments by £30.64 on a repayment mortgage, this goes up to £52.08 a month on an interest-only mortgage.
John Goodall, CEO and founder of Landbay, said that the rise in rates could be enough for landlords to increase rents following the regulation changes to the sector over the past two years.
“A 0.25% uplift might seem small, but the message it would give to the markets, of monetary policy normalisation, could spook landlords, especially those embarking on long-term tenancies,” Goodhall said.
“A quarter of a percent is not going to have a huge impact on rental prices overnight, but symbolically it has the power to galvanise landlords to price in many of the tax and regulatory changes that have been building up for some time now,” he added.
Andrew Turner, chief executive at Commercial Trust Limited, said the golden era of unprecedented low buy-to-let rates looked to be coming to an end.
“For many landlords, now is a time to re-evaluate and to consider their options.
From an affordability angle, what impact will a rates rise have on monthly repayments? Will you have to increase the rent that tenants pay, in order to meet these increased costs?
“Is now the time to consider remortgaging and taking advantage of the current low market rates with a longer-term fixed rate product, in case these products become more expensive?
“More expensive mortgages could have a detrimental effect on home buyer demand and affordability could be pushed further beyond the reach of many people. That in turn could affect house price growth – or capital growth, a valuable source of return for the buy-to-let investor.”
Impact
Around eight million Brits have never seen an interest rate rise, meaning they could potentially be underestimating the consequences of a hike on their mortgage payments.
According to the Financial Conduct Authority, one in seven homeowners would struggle to pay their mortgage if repayments went up by £100 or less per month.
A recent survey by Which? also found that one in 20 people on variable rate mortgages believe a rise would leave them struggling financially, while 31% feel their day-to-day living would be impacted.
The impact of a rate rise could also be exacerbated by the Brexit vote. Figures from the National Institute of Economic and Social Research show that UK households are £600 worse off following the decision to leave the EU.
The think-tank said it was “almost certain” the Brexit vote had hit living standards and economic growth.
As inflation continues to rise, there are fears interest rates could go even higher. However, the good news for homeowners is that the Bank of England has said that any further hikes will be gradual and limited to protect borrowers from defaulting.
