Revealed: the real cost of a predicted interest rate rise for large borrowers

The UK’s economy had higher than expected growth in the three months to September – increasing the chances of a rise in interest rates in November. It follows rising inflation and comments from the Governor of the Bank of England, Mark Carney, and has led to markets pencilling next month for the first increase in the cost of borrowing for more than nine years.

According to 2015 figures, one in 14 borrowers has a mortgage of more than £500,000[1] and a rise in interest rates will significantly impact their day-to-day finances. CEO of broker largemortgageloans.com Paul Welch says, “It’s incorrect to think that people with larger mortgage loans are the super-rich who can easily service increased mortgage payments. There are thousands of borrowers in this category for whom a rise in interest rates will have a significant effect.”

The final quarter of 2017 has already seen some of the largest mortgage lenders in the UK, including Barclays, NatWest, Nationwide, Halifax and a handful of other banks and building societies, raise interest rates.

Welch continues, “We’ve been advising clients to get their mortgages in order for several months as we fully expect to see an increase in November. If it doesn’t come as soon as expected, it’s only a matter of time as it’s unrealistic for the rate to stay this low for much longer. Time is tight before the beginning of November, but there’s still a window of opportunity to review your options if you act now.”

According to figures released by the Bank of England, 43% of homeowners are on a variable or tracker rate mortgage[2]. To illustrate the very real effect of potential rate rises, largemortgageloans.com has created an illustration of what the annual increase in payments might be on a capital repayment 20 year mortgage with a 0.25% increase:

(Source: largemortgageloans.com)

On an interest only basis, borrowers can expect to pay the following:

(Source: largemortgageloans.com)

For the 57% of homeowners on fixed rate products, the impact of a base rate rise will not have such an immediate impact.  However, in the longer term, when the initial period of their mortgage comes to an end they will eventually have to face higher rates. Mark Carney has indicated rises in the UK would be “gradual” and that the UK could see a pattern like the US. Welch advises, “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 it’s crept up; one year later to 0.75%, three months later to 1% and again three months later to 1.25%”

The table below considers the effect on an interest only mortgage of £500,000:

(Source: largemortgageloans.com)

Welch continues, “Looking at the last 25 years, the data is stark. If you average the interest rate between 1992 and 2006, it hovered around 5.5%. In contrast, the average interest rate for the past ten years has been just 1.27%[3]. This has led to unrealistic asset values and a market which is currently overvalued. We’re now seeing this start to correct itself in the most overvalued areas, namely London, but there still needs to be more correction. I believe this will happen over the next decade as interest rates normalise and asset bubbles created by the artificially low interest rates correct themselves.”

Largemortgageloan.com top tips:

• Even if rate rises don’t happen as soon as November, it’s only a matter of time before they will have to normalise. Bear this in mind and think about remortgaging now.
• For those nearing the end of the initial period of their fixed rate mortgage, it may even be advantageous to pay the requisite Early Repayment Charge and remortgage to another fixed rate deal now. Although the Early Repayment Charge may be incurred, they may find they save money in the long term in the form of lower mortgage repayments.
• Make sure your mortgage is portable, so that if you have fixed at a low rate and decide to move house then you don’t lose this lower rate deal.
• Lenders usually honour the interest rate agreed when the mortgage application is made. So even if your mortgage does not complete until after the Base Rate rises or the lender raises their rates, you will still benefit from the rate you applied for initially. However, with rates already rising you will need to get your mortgage application submitted soon.
• Don’t fall into the SVR trap! Your mortgage will revert to the lender’s SVR (Standard Variable Rate) once the initial period of your mortgage has come to an end. Falling onto your SVR could cost you dearly. The SVR 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 it can also be lower.[4] If the base rate rises, your SVR will most likely also increase, as lenders are likely to pass an increase on to their customers. It is crucial to review your mortgage to make sure that you are not paying more than you need to. Seeking professional mortgage advice will help you to find the mortgage best suited to you.
• Get your house in order – 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. 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.
• If November comes and the base rate rises before you’ve had the chance to fix your mortgage rate, don’t lose heart! There should still be mortgages available at lower rates, but they are likely to be few and far between and snapped up quickly. Act as soon as possible and talk to a broker with a strong network and access to a wide range of lenders.