BY | DEC 17, 2021
The Bank of England has increased interest rates from 0.10% to 0.25% in an attempt to tackle rising inflation in the UK. I think it would be fair to say, that almost everyone was surprised by the decision from the BOE to increase the base rate before the end of the year.
Predictions had indicated that the rise was definitely coming, but not likely until Q1 of 2022. However, it’s really important to understand what this actually means to you personally, and what (if any) affect this would have on your payments.
At Advantage, we had originally tackled the pros and cons of a potential rise in the base rate, and you can read the previous article here:
When will mortgage interest rates rise, and what does it mean for you?
As we previously advised, the main point is: Do Not Panic!!
Will my mortgage payments go up?
Only if you have a variable rate mortgage – typically a tracker that follows the base rate, or a loan on a lender’s standard variable rate. A tracker mortgage will directly follow the base rate. It is likely that you won’t see a difference in your payments until next month, and you should receive a notification from your current mortgage lender. If in any doubt however, contact your lender to discuss any potential impact to your payments, and when they will become payable.
If you are on a lenders standard variable, or a “discount” rate it is potentially less straightforward as these can change at the lender’s discretion, and can be completely separate from the BOE base rate.
It is very unlikely that banks and building societies will not ignore the recent increase, so, to be on the safe side, you should expect a rise in your payments and try to budget ahead of time.
With the lenders own Standard Variable Rates, if they wanted to, they could increase rates by more than the 0.25% BOE rate. As an example, HSBC’s standard variable rate is 3.59%; if it passes on the full rise borrowers paying it will move to a rate of 3.74%. On a £150,000 mortgage arranged over 20 years that will mean monthly repayments go up by £11.66.
Most borrowers are, however, on fixed-rate mortgages. Interest rates have been so low in recent years that locking in has been attractive, and according to government statistics since 2019, 96% of new mortgages for owner-occupiers have been taken on fixed rates. In total, 74% of outstanding mortgages are fixed, and will not see any immediate impact from the change.
What about my other borrowing?
After taking out your mortgage, you may have taken out further borrowing with your lender. You may have wanted to carry out some home improvements for example, and added the amount to your original mortgage balance. This is often referred to as a “further advance”.
If this is the case, the same rules apply, but may be split over the separate mortgage “accounts” that you have. For example, your main mortgage account may still be on a Fixed Rate, therefore there will be no impact on your payments. If you then took a further advance on a Variable Rate, it is that portion of the payments that is likely to increase.
Again, using the previous example with HSBC, with their standard variable rate being 3.59%; if it passes on the full rise borrowers paying it will move to a rate of 3.74%.
On a mortgage of £150,000, if your main mortgage account is on a fixed Rate over 20 years there will be no increase to the payments on that account. However if you also have taken additional borrowing for a further £50,000, on the variable rate, that will mean monthly repayments on that portion of the loan will go up by £3.88.
Will this affect the housing market?
Realistically, a small rise like this is unlikely to have much impact – according to Dominic Agace, the chief executive of estate agents Winkworth, it has been “priced into the market in the costs of mortgages and buyers’ expectations” since before the Bank’s last decision.
Although we have seen a small increase in rates across the board, mortgage rates still remain historically low. Further rate rises and/or sustained high inflation will likely have an eventual impact though, as longer as lenders’ affordability checks remain in place. Currently, most lenders use their standard variable rate plus three percentage points when “stress-testing” applicants’ finances, and as their rates increase the mortgages that are judged affordable will get smaller.
What should I do?
Hopefully, as you can see in the examples above, the increase in the base rate will actually have a relatively small affect on your mortgage payments. It does of course depend on the size of your mortgage, and the remaining term, but our stance on “Don’t Panic” remains the same.
It is uncertain at this time regarding the future plans for more increases to the BOE base rate, but if the predictions stand, it is likely that there will be further hikes throughout 2022.
Of course, if you have any concerns at all, it is an ideal time to either speak to your current lender to understand the direct impact this may have on your payments, or speak to an independent broker to offer your guidance and advice, and compare your current mortgage to the wider market.
At advantage, we’d be happy to offer personal, friendly and expert advice, and be able to guide you on your individual circumstances. Please contact us via:
Phone: 0117 4420604
Email: info@advantagefs.co.uk
Website: www.advantagefs.co.uk
