We’ve all braced for this, but it’s still a huge blow – today the Bank of England raised interest rates by 0.25% to 4%.
The cost of borrowing remained at 3.75% throughout the year. But with the conflict in the Middle East, which has been pressuring inflation here in the UK, in its ninth month it was inevitable that the policy rate would be raised at some point to help curb inflation.
If you are a homeowner or about to take out a mortgage, the first thing on your mind today is, “How does this affect my mortgage?”
The answer to this question depends largely on what type of deal you have, at what stage of your deal, and whether you are a homeowner or a potential buyer.
Whatever your situation, we’ve put together a short guide to help you figure out how a 0.25% increase will affect you and what you can do to mitigate any payment increases.
You’re just starting out or are in the middle of a fixed-rate mortgage deal
Unless you have less than six months left on your deal, you will not be affected by today’s decision. Your rate is fixed so your premiums will remain the same. However, it may be a good idea to keep an eye on future price decisions so you can prepare to terminate your trade.
According to Susanna Streeter, chief investment strategist at Wealth Club, three more interest rate hikes have been priced in by financial markets. Furthermore, the Bank of England’s monetary policy summary revealed that its decision-making members expected inflation to rise to around 5% by the middle of next year.
So, it pays to keep your wits about you if you’re due to remortgage in 2027.
You are on the mortgage tracker
Tracker mortgage providers pass on any rise or cut in the Bank of England (BoE) base rate almost immediately, so repayments are likely to rise very soon.
For someone with a £250,000 mortgage over 25 years, the 0.25% increase added around £37 a month to their repayments, explained Adam French, head of consumer finance at Moneyfacts.
With interest rates expected to rise in the future, this may be a good time to talk to a mortgage broker about your options.
It is worth noting that many borrowers have tactically chosen trackers as a calculated risk. Brokers have reported that clients are showing increased interest in these trades as they are currently cheaper than fixed prices and most of them offer more flexibility as they come with no exit fees.
Mark Harris, chief executive of mortgage broker SPF Private Clients, warned: “This approach should only be considered by those who can afford to miss out – that is, if interest rates rise further, they will still be able to afford the mortgage repayments – and it is important to take the advice.”
You are on a variable rate mortgage
If your rate is variable, and you’re not on a tracker deal, you’re likely tracking your lender’s default rate – also known as the Standard Variable Rate (SVR).
Providers typically pass on interest rate changes at the Bank of England, but not necessarily as quickly as tracker deals. Therefore, it may be a good idea to talk to a broker about your options especially if you have fallen into SVR due to financial challenges.
Sarah Coles, head of personal finance at AJ Bell, said: “If you’re stuck because your circumstances have changed and you’re worried you won’t be able to pass the affordability tests for a new deal, it’s worth speaking to your existing lender who may allow a transfer.
“You may not get the best possible deal on the market, but it should at least be less painful than a standard variable-rate mortgage.”
Your fixed mortgage deal will expire in six months or less
If you are due to exit your current mortgage deal within the next six months, you are likely already looking at a remortgage or transfer product.
The good news – if it can be described that way – is that today’s Bank of England rate hike has already been priced in by lenders, and so products have already undergone the relevant price adjustments.
David Hollingsworth, associate director at L&C Mortgages, said: “Fixed rates have already factored in market expectations of not just this rise but more to come, so I wouldn’t expect to see a direct reaction to today’s announcement in fixed mortgage deals.
“Ironically, we even saw Some lenders lower specified fixed interest rates Last week, swap rates fell slightly. However, there is ongoing uncertainty about the geopolitical situation, so it is too early to expect this to become a mainstream trend.
You have two options if you are due to exit your deal – to remortgage to a new lender, or to stay with your current lender and ‘convert’ to another mortgage deal with them.
Remortgaging gives you more options and so you have a greater chance of finding a cheaper deal. However, you will need to go through all the checks involved in getting a new mortgage. Therefore, moving the product with your existing lender will require less paperwork and fewer appraisals.
Some experts say fixed interest rates could fall – but with the Bank of England expected to hike interest rates further, there is no guarantee.
Therefore, the advice is unanimous in all areas. Hollingsworth summed up what many brokers are saying: “Live the price sooner rather than later in case we see more volatility. Rest assured that you can jump to a better price before expiration if prices improve.”
“Others may be wedded to the proposition that interest rates will not necessarily continue to rise, so we could still see borrowers willing to track the currently low interest rates. This is a gamble though, as interest rates may still rise more or faster than expected, so it is only for those who can afford that risk.”
If you are buying a house
Getting a mortgage in these uncertain times can seem particularly daunting – buying a property is stressful at the best of times.
If you’re looking for a fixed-rate mortgage, as described in the section above, pricing is unlikely to be significantly affected by today’s interest rate rise because lenders have already priced in the rise.
Review the relevant section above for the pros and cons of using a tracker versus a fixed price. But, above all, make sure you get good advice from the entire market broker.
Speaking to Newspage, Malcolm Davidson, director of Hull-based UK Moneyman, said: “Prospective homebuyers should not be alarmed by this news. The market has long expected this increase and fixed rate mortgage interest rates have reflected that in advance – in fact, we have seen some lenders cut rates already this week.”
“Owning a home is still better than renting for most people who can afford it, and while 1% mortgage rates are long gone, the deals on offer are now around the long-term historical average.”
