The interest base rate set by the Bank of England (BoE) has increased for the second time in a decade. It’s a move that’s been welcomed by savers; but what does it mean for mortgage holders?
The base rate is now 0.75% after a modest rise of 0.25%. It follows a 0.25% increase in November last year. As your mortgage is likely one of your biggest monthly expenses, even this small rise can have an impact.
The most recent BoE rate rise is likely to be the first of many. Interest rates have been low since the 2008 financial crisis. As the economy recovers, it’s reasonable to expect them to start creeping back up.
While the rate rises will probably be gradual and spread out over a long period of time, planning ahead is important. Even a small rise can affect your finances. Consider whether you could afford your mortgage repayments if the interest was to increase by 2% suddenly. If you’d struggle in this scenario it’s worth looking at what steps you can take now.
In the past, the BoE base rate has been as high as 17%. This is incredibly unlikely to happen any time soon but highlights why keeping track of interest rates is crucial.
Does this affect what mortgage you should choose?
If you’re a first-time buyer or looking for a new mortgage deal, the recent interest rate increase may have left you wondering which type of mortgage you should choose: fixed, variable or tracker.
Fixed rate mortgages: If you want the security of knowing what your outgoings will be, a fixed rate mortgage may be for you. The interest you pay will be defined for a fixed period of time, usually two, three, five or 10 years.
It provides you with consistency and can be useful when budgeting. But, on the flip side, you also wouldn’t benefit if interest rates were to fall. Usually, the interest rate on a fixed mortgage is higher than a variable alternative. However, in the long run, you may be better off if rates increase.
Variable or tracker mortgages: The interest rates of variable and tracker mortgages can move up and down, reflecting wider changes in the economy.
A tracker mortgage will be tied to the base rate that the BoE sets. If you have one of these, your repayments will have increased almost immediately after the recent BoE announcement. A variable mortgage will be linked to the rate that your lender sets, this will often follow a similar pattern to the BoE rate.
If you want a mortgage that offers you a lower interest rate now, variable mortgages will usually tick this box. However, you should be prepared for the amount you pay to increase over time.
Seven tips for finding lower interest rates
With interest rates rising, now is the perfect time to look for ways to reduce the amount of interest you pay. Here are seven tips to get you started:
1. Improve your credit score: One of the most effective things you can do to improve the interest rate you’re offered is to assess your credit score. When calculating the borrowable amount and the rate to offer, lenders will look at this. Making sure there are no inaccuracies, meeting minimum repayments for credit, and registering on the electoral roll are steps you should take. If your credit score is already considered good, make maintaining it a priority.
2. Reduce your debt-to-income ratio: The less debt you have, the better. A high amount of debt can suggest you don’t effectively budget and may default on payments. Reducing debt will directly have a positive impact on your credit score too. If you have savings to fall back on, this can reduce the interest rates offered. As interest rates start to rise, it’s also creating a better environment to be a saver, so it’s a win-win move.
3. Check your current deal: If you already have a mortgage in place, it may no longer be the best option for you. In some cases, it can be beneficial to move. As your circumstances change and those of the wider economy, there may be better interest rates for you to take advantage of now. Switching to access improved interest rates will need to be weighed up against any fees or penalties you may need to pay.
4. Increase your deposit amount: The greater the deposit you can put down, the better the interest rate you’ll be offered. A standard mortgage will require you to put a minimum of 5-10% of the property’s value down as a deposit. However, increasing this to 20% can mean paying far less overall in terms of interest. If you’re a first-time buyer saving a larger deposit can pay off.
5. Shop around: It can be tempting and easier to go to your usual bank or current mortgage provider. But it’s a choice that could mean you end up with a higher interest rate. Take the time to shop around and investigate what’s on offer; it’s a move that could mean you save thousands over the length of your mortgage term.
6. Consider fixed rates: When you first look at the different interest rates on the market, variable rates will often look like a better bet. However, you may find that a fixed rate mortgage means you pay less interest over the long term. Assessing which type of mortgage is for you is a personal decision but looking at the different options is important.
7. Use a mortgage adviser: With so many different mortgage lenders on the market, finding the deals that offer you the lowest levels of interest can be a challenge. This is where a mortgage adviser can help point you in the right direction. They’ll also have a better understanding of what lenders are looking for, helping to present you in a way that’s more attractive.
If you’re preparing to take out a new mortgage, whether on your current home or as you move, please get in touch with us.