One month ago, interest rates rose to 0.75% from 0.5% as a result of the decision made by the Bank of England, the highest it has been in almost a decade. The interest rate is the reference percentage for how much those that borrow are charged, and how much extra those that save can receive. It’s also important to remember that the main aim for the Bank of England is to keep inflation as low as possible. Despite this sounding like a small increase, this growth affects those that currently have a mortgage or those looking towards this.
Around four million households have a variable or tracker rate mortgage, meaning they will be affected directly by the change in interest rates. Those on this type of mortgage will experience an increase in their monthly payments. For most on variable rates, they tend to be of an older generation with a small balance left on their mortgage meaning the rise is unlikely to make much of a difference to their payments. However for those with a larger balance left to pay, are likely to experience a greater increase in their regular payments. For example, for those with a mortgage balance of £125,000 (the average balance is £112,000), the annual increase to their payments would be £187. On the other hand, if a household had an outstanding balance of £250,000 the annual increase would be £374. If you are unsure what type of mortgage you are on, make sure you contact your lender to check.
Fixed interest mortgage loans are now more common, and they account for just under five million households. These are a great option to maintain lower regular payments for as long as possible, especially as fixed interest rates are currently at all all-time low at around 2.09%. However, for those considering mortgage options acting fast is important as rates are predicting to go up. Due to the changes, such mortgages are predicted to become more common that the standard variable rate as they provide more security in monthly payment amounts.
If you are considering a remortgage it’s vital to know what the terms and conditions are of doing so, as there is the early repayment charge which can really determine whether it is worth it to switch to a fixed-rate from a variable. It’s a great idea to use an online mortgage calculator to compare the best mortgage rates. The obvious benefit of switching means the potential protection (depending on the length of your plan) from further interest rate rises for another five years. If this is something you are thinking about, it is advisable to get an expert opinion before just to ensure you have considered the decision carefully.
Given the financial pressure that most households are under, and living costs if interest rates were to further increase this would likely have a knock-on effect to many families. If you’re suffering from financial issues or are worried, you can seek advice from the Money Advice Service. The Bank of England are expected to avoid this, and a return to the 5% base rate is not envisaged by anyone in the City. If you need any more information, or financial guidance on the subjects discussed in this article do contact expert advisors.