Ever since the 2008 financial crisis, the UK’s interest rates have remained at historic lows. In recent months, however, the Bank of England (BoE) has increased the base interest rate five times in response to climbing inflation.
Since December 2021, the base rate of interest has risen from 0.1%, to the 1.25% we see today. So, you may be wondering how rising interest rates may affect you. While your savings may earn more interest when the base rate increases, how does this affect your mortgage?
Read on to find out everything you need to know about climbing interest rates, and how they may affect your mortgage.
The Bank of England has increased the base interest rate in response to rising inflation
As mentioned, inflation has been rapidly on the rise in the UK. According to the Office for National Statistics (ONS) prices rose by 9% in the year to April 2022 – the highest increase in 40 years.
One of the most important tasks of the BoE is to keep inflation in check and, to do so, one of the tools in their armoury is to increase the base rate of interest.
Typically, when interest rates are low, inflation tends to increase. This is usually because savers are encouraged to spend rather than save as they aren’t receiving as much interest on their savings. In turn, this can drive up inflation.
The opposite can be seen when base rates are high – inflation tends to decrease since people are encouraged to save their money and earn interest on it, rather than spending it.
Since inflation is so high – due to factors such as the war in Ukraine putting strain on supply chains, worker shortages, and recovery from the pandemic – the BoE has been forced to increase interest rates in an attempt to control inflation.
Interest rates don’t seem to have peaked yet, either; the BBC reports that rates are expected to reach 3.5%.
Of course, when interest rates are high, you generate more of a return on your savings. But have you considered what sort of effect this could have on your mortgage? Keep reading to find out.
Different types of mortgages will be affected in different ways by high interest rates
When it comes to mortgages, the impact of rising interest rates will depend on the type of mortgage you have.
If you are currently on a fixed-rate mortgage deal, then you will be glad to hear that you will typically be impacted the least by rising interest rates.
This is because, when you sign up for a fixed-rate mortgage, your rate is fixed for a specific period of time, meaning your repayment amounts won’t be affected until you reach the end of your deal.
However, this doesn’t mean your payments won’t change in the future. It’s likely that, when your deal expires, or you remortgage to find a new fixed-rate deal, you will end up having to pay more.
As the name may suggest, tracker-rate mortgages are a type of mortgage that is directly linked to the BoE base rate. While these may offer a great deal when the base rate is low, repayments are likely to increase as the rate goes up.
For example, if you have a £350,000 repayment mortgage over 25 years and are paying an interest rate of 2.5%, your monthly payments would be around £1,570. However, if rates rose to 2.75% on the above mortgage, your monthly payments would rise to £1,614. That’s an increase of £44 a month.
If you have a variable-rate mortgage, you may experience an increase in interest repayments. The rates for a variable-rate mortgage depend on whether your lender decides to increase their standard variable rate (SVR) in line with the BoE base rate.
Generally speaking, lenders tend to increase their SVR when the base rate of interest increases. So, if you are on a variable-rate mortgage, the chances are you will see your interest repayments rise as the base rate does.
There are steps you can take to manage rising mortgage repayments
If you suspect your mortgage repayments could increase due to rising interest rates, the first thing you should ideally do is figure out what type of mortgage you’re on, and how your payments will be affected.
If you have a variable or tracker-rate deal and you’re worried about rising interest rates, you could consider switching to a fixed-rate deal.
The first thing you should do is to establish whether there are any “early repayment charges (ERCs)” for repaying your current mortgage. If there are, it could mean that it won’t be cost-effective for you to switch.
If there are no ERCs, or your existing deal ends shortly, it could be worth shopping around to see if a more appropriate deal is available.
Of course, if you’re worried about rising interest rates and the effect this may have on your mortgage, one of the best things you can do is speak to us to discuss the ways you can properly manage rising mortgage repayments.
Get in touch
If you would like to discuss rising interest rates and how your mortgage will be affected, then please get in touch. Email email@example.com or call (0207) 808 4120 to find out more.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.