Mortgage rates are set to increase further after the Bank of England (BoE) made its seventh interest rate hike in a row.
The central bank announced today it had raised the base rate by another 0.5% to 2.25% in a bid to bring down inflation.
However, for homeowners, this increase – which has elevated interest rates to their highest since the financial crash in December 2008 – will have an impact on how much they pay for their mortgage.
For anyone on a tracker or variable rate the effect will be immediate. For anyone on a fixed-rate – there will be shelter from this rise until your deal expires.
Alice Haine, personal finance expert at BestInvest, said: “With some households already struggling to absorb the reality of paying almost 10% more for a basket of goods than a year ago – the prospect of even higher mortgage rates could be a real tipping point for some.
“The government’s package of handouts and emergency measures to support struggling households may receive more impetus when [Chancellor Kwasi] Kwarteng delivers his mini-budget on Friday as [he] pins his hopes on growth, but that doesn’t mean household finances aren’t already stretched to the max with some people forced to budget very carefully just to keep their heads above water.”
How will my mortgage be affected by the interest rate rise?
So what does it mean for you?
If you are on a tracker mortgage – the increase in line with today’s hike by the BoE will be automatic. If your deal is due to expire, you are advised to look at fixed-rate deals to protect you from future rate hikes.
If you are on a standard variable rate (SVR) mortgage – these rates (which homeowners revert to to when their initial deal ends and they don’t remortgage) generally also rise in line with the base rate. If you are able to switch, you’ll get a better rate by moving to a new deal so it could worth speaking to a broker about remortgaging.
If you are on a fixed-rate – you will be protected from interest rate rises until your deal expires. Around three quarters of mortgages are fixed so most borrowers will not see an immediate impact from today’s hike.
If you are in the early stages of a five or 10-year deal, says Alice, you can relax. But for those with rates expiring the prospect of higher repayments will be looming.
“If they haven’t taken action in the run-up to their existing deal’s expiry date, then they need to act very quickly otherwise they risk ending up on their lender’s standard variable rate – one of the most expensive forms of mortgage borrowing,” Alice explained.
She added: “Remember, some lenders allow you to lock in a fixed rate up to six months before a current deal comes to an end – something that allows borrowers to get ahead of future rate rises – so start looking for a new deal now if your current deal is expiring next spring.”
Preparing your mortgage for tough times ahead
Whilst there are indeed lenders which allow you to lock into your deal six-months ahead of time – not all offer this option. Some may only allow three-months.
For this reason, if you are six months away from remortgaging, it’s a good idea to see a broker as they will be able to find you the most suitable option.
Most experts are advising you act quickly as the decent deals aren’t staying on the shelf for long.
Emma Hollingworth, distribution director at MPowered Mortgages, said: “Securing rates quickly, before they disappear and are replaced, is likely to become an increasingly important factor for homebuyers and those looking to remortgage.
“MPowered Mortgages has worked out that a homeowner could save over £2,000 over two-year period if they lock into a deal now, if mortgage rates rise alongside the base rate by a further 0.5%.
“In the current climate where mortgage rates and the cost of living continue to rise, borrowers may choose to consider longer-term fixed rate mortgages so that they can have certainty over their monthly mortgage payments over a longer period.”
Try not to panic
Whilst today’s 0.5% rise may come as a shock to borrowers, it’s important to put the rise into context.
Laura Howard, personal finance expert at Forbes Advisor, said: “When viewed in the centuries-long history of the Bank of England interest rates, 2.25% is still relatively low. But right now, it’s a huge shock.
“The truth is, an entire generation of borrowers have never known interest rates at this level – the last time the Bank rate stood higher was 12 years ago in November 2008 when it was at 3%.”
And whilst many experts are predicting further rate rises, others say this will not be a very long-term increase.
Sarah Coles senior personal finance analyst, Hargreaves Lansdown, said: “The threat of a recession lurking further down the line means rate expectations are lower when you look a few years down the track.
“It means banks are expecting rates to rise, then fall, so they’re offering plenty of cheap five-year deals.”
