What does the Bank of England’s rate rise to 0.75% mean for your mortgage?

At the beginning of the month, The Bank of England raised its interest rates by from 0.5% to 0.75% – the first time rates have risen in a decade. What exactly does this mean for your finances and mortgage repayments in particular?

Mortgage borrowers have enjoyed the favourable market conditions of recent years, with cheap deals helping those onto and moving up the property ladder. Many homeowners will have taken advantage of these cheap deals and will have fixed into low rates over the past couple of years.

As the vast majority of mortgage borrowers are on fixed rates, most home owners will not feel the impact of the interest rate rise and won’t have to face an increase in monthly payments until their fixed term ends.

However, around 3.5 million residential mortgages are variable or tracker rate mortgages, and for those on these type of deals it is likely monthly repayments will increase, if not significantly.

Key points for borrowers following the interest rate rise:

  • Fixed rates will remain fixed for borrowers, and monthly repayments will remain the same, until their fixed term ends.
  • Those most vulnerable to rising rates will be borrowers on their lender’s Standard Variable Rate (SVR).
  • Those also on tracker mortgages may see their monthly repayments increase if their lender tracks the Bank of England base rate.
  • Experts, economists and credit agencies have calculated that borrowers on SVR and tracker mortgages could find themselves paying between £200-£400 extra per year following the interest rate rise (based on a typical SVR deal of 3.99 per cent or a tracker two per cent above base rate on a 20 year mortgage worth £250,000).
  • First time buyers may be disadvantaged, as lenders will most likely cut their cheapest mortgage deals following the interest rate rise.
  • On a more positive note, mortgage rates still remain the lowest they have been for years, house prices are increasing and there is healthy competition amongst lenders, so good mortgage deals can still be found, including for first time buyers.

Although many borrowers appear to have foreseen rate changes in the pipeline, and have sought to fix their mortgage rate, those on SVR or tracker options may feel it worth considering reorganising their finances and looking into other available deals. Given the rising interest rate environment, longer-term fixed rate mortgage deals are likely to be much more popular this year as a safer option for borrowers.

Longer term, property experts are still predicting that house prices will rise by at least 1 per cent in the next year, as the economy and labour markets continue to stabilise and wages rise, encouraging foreign investment and boosting buyer confidence.

Following the UK’s economic and political uncertainty of recent years, the interest rate rise, though perhaps unwelcome by some mortgage borrowers, has been acknowledged by most as a sign of genuine economic recovery for the UK, which should also act to bolster the housing market in the coming months.