Interest rate rise – what it means for you
The Bank of England has raised the base rate by a quarter of a percentage to 0.75% - only the second rise in over a decade. We take a look at what it means for mortgages and house prices
What is a Base Rate?
This is the Bank of England’s official borrowing rate – what it charges other banks and lenders when they borrow money. Simply put, a rise in the Base Rate is good for savers and bad for borrowers, including those with a mortgage.
Impact on mortgages
Bills are likely to go up in the next month or so if you’re on a standard variable rate or a ‘tracker’ which tracks the basic rate. But if you’re on a fixed rate, there won’t be any change until your deal ends.
Variable rate mortgages
About 3.5 million households have a variable or tracker rate which moves up or down in price as the basic rate changes. The proportion of borrowers with variable rates mortgages has fallen from a peak of 70 per cent in 2001 to 35 per cent in 2018, according to Nationwide. These are the people who will be most affected, as their payments will likely increase. Barclays and HSBC were among the first lenders to announce they would pass on the full 0.25 per cent increase to borrowers on standard variable rates (SVR). For most borrowers, it will be a relatively small increase.
For those with a current mortgage balance of £150,000 on a variable rate of 3.99 per cent with 20 years left on their mortgage, their monthly bill will increase by £20 per month, according to figures supplied by Halifax. That’s equal to £240 per year. For those with a bigger loan, the increase in their bills will be greater.
Tracker rate mortgages
These are different from other variable rate mortgages in that they follow or track another rate, usually the Bank of England base rate. They don’t match the rate but are set at a margin above it, for example base rate plus one per cent. Tracker mortgages can be anything from one year to five years or even a lifetime which means the whole term of your mortgage.
In this case, an extra 0.25 per cent adds £12 a month (£144 a year) to £100,000 loan and £24 a month (£289 a year) to a £200,000 loan.
Fixed rate mortgages
At present, about two-thirds of borrowers are on fixed rates, typically two or five years. Regardless of what happens to the interest rate, with a fixed rate the monthly payment remains unchanged for the length of the deal. Borrowers on fixed rates won’t see an immediate change. However, when their term ends they may face bigger monthly bill if their mortgage reverts to the standard variable rate. Some 28 lenders increased their fixed rates in anticipation of a base rate increase, according to Moneyfacts. On the other hand, depending on when they took out the loan, borrowers could end up paying less. Some lenders have reduced rates on fixed mortgage products to be competitive, so they could get a cheaper deal.
Is this the start of future rate rises?
Mark Carney, Governor of the Bank of England, has continued to signal that he expects increases in interest rates to be gradual and limited. Nationwide economists predict the Base Rate is only likely to increase to around 1.25 per cent over the next five years. While the impact of the first hike may be small, someone with a repayment mortgage of £150,000 could eventually find themselves paying £61 a month more if rates increased to 1.25 per cent, according to a handy rate change calculator supplied by Halifax. Fixed rate mortgages continue to be popular with borrowers looking to protect themselves from uncertainty.
Impact on house prices
The recent Base Rate increase will affect house prices only modestly, says Nationwide. This is because most buyers are on fixed rates for years to come. Halifax is continuing to predict growth of zero to three per cent for 2018. House prices rose 1.4 per cent in July alone, taking the average house price to a new record of £230,280, according to Halifax. Meanwhile the annual growth jumped from 1.8 per cent in June to 3.3 per cent in July, the largest increase since November. Next month’s figures will be the first to reflect the impact of the Bank of England Base Rate rise to 0.75 per cent.