All eyes have been on the Bank of England for several months, with 1speculation mounting of a rise in interest rates. The industry was fully expecting a rise in May, but 2weaker than expected economic performance meant 3the committee voted for a ‘wait and see’ approach. Finally, the decision to raise interest rates from 0.5% to 0.75% came during the 4MPC’s August 2018 meeting. To put this into context, it’s 5only the second rise in a decade. We have lived through a period of staggeringly low interest rates, so why has the Bank of England voted to increase them now, and what does it mean for mortgage interest rates?
Why Has the Bank of England Raised Interest Rates?
In recent years, the 6UK economic policy has closely followed that of the US.
largemortgageloans.com Founder and CEO Paul Welch says, “If you look to the US market, the Federal Reserve rate spent 7 years at 0.25% before rising to 0.5% in 2015. Since then, 7it’s risen seven times, to a benchmark of 1.75-2%, which is the highest level since 2008.”
The Governor of the Bank of England – Mark Carney – has been quoted as saying “8Rates can be expected to rise gradually. Policy needs to walk, not run, to stand still.”
So why now? The committee’s unanimous decision was partly based on the fact that the BoE believes that wages are predicted to grow – 9a notion which has been met with some scepticism. Many believe that interest rates have risen so that the BoE has ‘somewhere to go’ should 10another recession or a no-deal Brexit hit. Whatever the reason, the rate rises are here, and it’s important to know how they might affect you.
How Much Will Mortgage Interest Rates Rise?
The majority of large lenders 11have announced mortgage rate rises and different announcements are being made every day. Check the latest news and comparison websites, and ensure you speak to a mortgage broker for up-to-date, bespoke advice on the best products tailored to your situation.
How Will Interest Rate Rises Affect Me If I Have A Capital Repayment Mortgage?
Across the UK, 129.1 million households have a mortgage. Of these, more than 3.5 million are on a standard variable rate or a tracker rate. These are the people who will be most affected, as their monthly payments will increase.
largemortgageloans.com have created an illustration to demonstrate how the 0.25% interest rate rise might impact mortgage payments on a 20-year capital repayment tracker rate mortgage on a variable rate of 2.00% before the increase in the interest rate.
Cost of the mortgage taking account of the 0.25% rate increase.
| Mortgage Balance | Current Monthly Payment at 2% | Monthly Increase in Payments | Monthly Payment at 2.25% | Annual Increase in Payments |
|---|---|---|---|---|
| £100,000 | £505.88 | £11.93 | £517.81 | £143.16 |
| £200,000 | £1,011.77 | £23.85 | £1,035.62 | £286.20 |
| £300,000 | £1,517.65 | £35.77 | £1,553.42 | £429.24 |
| £400,000 | £2,023.53 | £47.70 | £2,071.23 | £572.40 |
| £500,000 | £2,529.42 | £59.62 | £2,589.04 | £715.44 |
| £750,000 | £3,794.13 | £89.43 | £3,883.56 | £1,073.16 |
| £1,000,000 | £5,058.83 | £119.25 | £5,157.08 | £1,431.00 |
| £1,250,000 | £6,323.54 | £149.06 | £6,472.60 | £1,788.72 |
| £1,500,000 | £7,588.25 | £178.87 | £7,767.12 | £2,146.44 |
| £2,000,000 | £10,117.67 | £238.50 | £10,356.17 | £2,862.00 |
| £2,500,000 | £12,647.08 | £298.13 | £12,945.21 | £3,577.56 |
| £3,000,000 | £15,176.50 | £357.75 | £15,534.25 | £4,293.00 |
How Will Interest Rate Rises Affect Me If I Have an Interest Only Mortgage?
Interest only mortgages will see a higher increase as, over the life of the mortgage, customers do not benefit from a 13reduction in the amount borrowed:
| Mortgage Balance | Monthly Increase in Payments | Annual Increase in Payments |
|---|---|---|
| £100,000 | £20.83 | £250.00 |
| £200,000 | £41.67 | £500.00 |
| £300,000 | £62.50 | £750.00 |
| £400,000 | £83.33 | £1,000.00 |
| £500,000 | £104.17 | £1,250.00 |
| £750,000 | £156.25 | £1,875.00 |
| £1,000,000 | £208.33 | £2,500.00 |
| £1,250,000 | £260.42 | £3,125.00 |
| £1,500,000 | £312.50 | £3,750.00 |
| £2,000,000 | £416.67 | £5,000.00 |
| £2,500,000 | £520.83 | £6,250.00 |
| £3,000,000 | £625.00 | £7,500.00 |
On an interest only mortgage of £500,000, customers will begin to see marked increases in repayments if interest rates creep up further:
| Mortgage | Interest rate rise | Annual increase in payments |
|---|---|---|
| £500,000 | 0.75% | £3,750.00 |
| 1% | £5,000.00 | |
| 1.25% | £6,250.00 |
How Will Interest Rate Rises Affect Me If I’m On A Fixed Rate Mortgage?
Perhaps due to the prospect of rising interest rates, the vast majority of new mortgage loans – 96% – are on fixed interest rates, typically for two or five years, although the market has seen an increase in the number of 1410 year fixed rate deals launched in recent times.
Currently half of all outstanding loans are on fixed rates, equating to about 4.7 million households. The impact of a base rate rise will not have such an immediate impact for these people. However, in the longer term, when the initial period of their mortgage comes to an end, they will eventually have to face higher rates.
When Will Interest Rates Rise Again?
Speculation on interest rate rises fluctuates depending on who you’re speaking to and the latest economic barometers. Latest indications suggest that we won’t see 15interest rates over 5% for 20 years or more, but most analysts are in agreement that gradual rises will continue – and those gradual rises chip away and slowly make borrowing more expensive. Therefore, it’s always best to think about the long-term.
What Should I Do About the Recent Interest Rate Rise?
If you’re an existing mortgage holder coming to the end of your deal, or a prospective mortgage holder, it’s important not to panic and ensure you obtain the right advice. If you’re in the process of having a mortgage agreed, lenders usually honour the interest rate agreed when the application is made. So even if your mortgage hasn’t completed yet, you should still benefit from the rate you applied for initially. Check with your broker, who can confirm this for you.
If you’re about to take out a mortgage, be mindful of the advice the BoE has given and the indication that rates are expected to continue rising in the future. Although nothing is certain, it helps if you think about the portability of your mortgage. Ideally always go for a portable deal, so that if you have fixed at a low rate and decide to move to a new house then you don’t lose this lower rate deal.
If you entered into a fixed deal back when interest rates were super low, you will see a difference in mortgage payments when you come to renew your deal, which can be daunting. However, don’t be indecisive. Take some advice from a broker about the best deal for your circumstances and don’t fall into the standard variable rate (SVR) trap! Your mortgage will revert to the lender’s SVR once the initial period has come to an end. Falling onto your SVR could cost you dearly as it often tracks a base rate set by the lender or the Bank of England base rate. It is most likely to be much higher than the initial mortgage rate, although 16it can also be lower.
Get your house in order and be prepared so that you can secure your deal ASAP. Mortgage providers need a list of documents in order to consider your application, including:
- Proof of identification
- Proof of residency for your current address
- Proof of income – last three months’ payslips and most recent P60 for employed / three year’s SA302s and accounts for self-employed or limited company directors
- Last three month’s bank statements showing all income and expenditure
- Most recent mortgage statement / redemption statement
Specific lenders may have other requirements but getting the basic information together will help speed up the application process.
Seek out professional advice as every situation is different. Ensure you’re talking to a mortgage broker who understands your specific set of circumstances and can build a bespoke solution for you which provides the best possible lending solution.
Your home may be repossessed if you do not keep up repayments on your mortgage
- https://www.thetimes.co.uk/article/up-or-down-interest-rates-and-the-future-of-your-finances-5tnlr23pw July 2018
- https://www.theguardian.com/business/2018/apr/27/uk-gdp-growth-rate-slows-first-quarter April 2018
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- https://www.express.co.uk/finance/city/605341/US-interest-rate-rise-matters-for-UK December 2015
- https://www.bbc.com/news/business-44473148 June 2018
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- https://www.theguardian.com/commentisfree/2018/aug/03/raising-interest-rates-mpc-wage-growth August 2018
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- https://www.thesun.co.uk/money/6735387/halifax-lloyds-10-year-fixed-mortgage-launch-homemovers/ July 2018
- https://www.theguardian.com/business/2018/aug/09/interest-rates-will-stay-low-for-20-years-bank-of-england-expert August 2018
- https://www.ft.com/content/7fffafd6-0291-11e7-aa5b-6bb07f5c8e12
