Interest rate rises: what does this mean for mortgages?
There has been a major shift in attitudes to lending recently following the Bank of England’s recent increase of 0.5% to its Base Rate, in the July ‘22 review meeting. This is the highest increase to the Bank of England (BoE) base rate in 27 years and a big blow to mortgage borrowers across the UK.
As the ‘Cost of Living Crisis’ intensifies, this is yet another blow to homeowners all over the country, many of which are already struggling to meet their monthly commitments. The cost of mortgage borrowing is likely to increase as the banks and building societies react to the news. Any borrowers who are not currently on a ‘Fixed Rate’ deal will be likely to see an increase to their monthly mortgage payments in the next month or two.
Anyone with an existing mortgage deal will be understandably concerned as to how these changes will affect their finances moving forwards. Generally, a mortgage will be a household’s largest monthly expense, so price increases are less than ideal combined with the rising cost of other expenses such as energy bills.
Below we’re going to outline inflation, the cost of living crisis and what the interest rate rise means for borrowers and mortgage providers moving forwards.
Why does inflation increase interest rates?
We stated above that the Bank of England have put the interest rate up to fight rising inflation. This presents the question “how does increasing interest rates reduce inflation?”.
Inflation is affected by supply and demand. If the general public have less disposable income, due to the cost of borrowing increasing, there is less demand for things like loans or mortgages which slows price rises.
An increase in interest rates will equal a decrease in demand, meaning in an ideal world inflation will stop rising drastically – though of course this isn’t guaranteed.
During the pandemic, banks slashed the base interest rates to a record low of 0.1% in an attempt to try and protect the housing market from collapse.
The decrease in interest was designed to encourage buyers not to put off moving house to minimise the impact on the housing market and in turn the UK economy.
The government also approved additional measures like the Stamp Duty holiday and the housing market actually thrived for a time, with many taking advantage of these temporary measures.
But of course, these lower interest rates and other measures couldn’t stay in place forever especially with costs everywhere else rising.
The cost of living in the UK has been increasing drastically following on from the Covid-19 pandemic and the current Russia-Ukraine conflict. Both of these issues have affected easy access to products such as crude oil, with this creating a ripple effect to other vital resources.
Inflation has spiralled in response, and the Bank of England is taking drastic steps to try and get it back under control – ensuring a big impact on financial services in the UK for the foreseeable future.
Cost of living increase
The UK is facing a cost of living crisis, with the current cost of living being at a 40 year high. Vulnerable groups such as pensioners or those with disabilities may be particularly worried how they are going to be affected by this, though there are some provisions now put in place by the government – with £37 billion of support pledged this year.
There are now schemes such as council tax rebates and additional cost of living support packages available. Check the gov.uk website for further details of the additional support in place HERE.
There are many factors in play at the moment increasing the cost of living in the UK, such as soaring energy costs. The wholesale price of gas quadrupled last year leading to an energy price cap rise of 54% in April, with a further increase in energy prices expected in October.*
Also needing to be considered is the price of petrol and diesel, which has risen exponentially over the last few months. Someone with an average family hatchback can expect to now be paying £85.69 for a full tank of petrol in 2022 compared to £60.87 in 2021 – a rise of £24.81 in just one year.**
With cars, vans etc being vital to many people’s livelihoods both for leisure and for work purposes (either for commuting or for the job itself), people all across the UK have really felt the impact of this increase.
Even leisure activities, such as restaurants and hotel stays, are increasing their prices in line with inflation according to the Office for National Statistics (ONS).
Review your mortgage
The various price increases UK wide are also guaranteed to affect mortgages, with inflation directly influencing the increase in interest rates – inevitably causing the cost of monthly mortgage repayments to increase if not on a fixed rate.
Our biggest advice for anyone who has an existing mortgage deal in place: review it. Even under normal circumstances, borrowers may choose to look into reviewing an existing mortgage arrangement for various reasons. A remortgage can be used to pay for a house remodel for example.
In the face of the economic situation in the UK at the moment, it is vital to consider the impact on costs of big monthly expenses such as mortgage payments. Even though interest rates have gone up, there is still the potential for saving on monthly repayments in various ways.
We have highlighted some of these in the table below:
|Switch to another lender||There is always the option of moving to a new lender even with an existing mortgage in place, but this can incur charges from the current lender for doing so – this could lead to significant savings long term though.|
|Remortgage with the current lender||Lenders can sometimes offer a special rate for existing customers who choose to remortgage so make sure to speak to the lender, to ensure the best deal possible is in place.|
|Change the type of mortgage agreement||In some circumstances, it could be possible to agree a new mortgage type on a fixed rate of payment. Speak to the individual provider for further information.|
|Shared ownership scheme: sell some of the property back to the landlord||Anyone who has bought a house under a shared ownership scheme has the option of selling a percentage of the property back to the landlord. Some of the money from this could be used to pay off part of your mortgage, which in turn would lead to lower monthly repayments.|
|Having equity in a property could lead to lower payments in some cases||If a property has been recently renovated, it may now be worth more than when it was initially bought. If there is equity in this property, the lender may agree to lower the monthly payments. Speak to the lender to see if this is a possibility.|
|Increase the term of your mortgage||Borrowers are able increase the term of their mortgage provided the lender agrees to those terms e.g. you could add an additional 5 years to the mortgage term. This would lower monthly payments but will lead to paying more interest long term.|
Anyone who is unsure of their best option for a mortgage can get in touch with a team of specialists like us. We can source the information needed to decide whether remortgaging is the right financial decision.
If interested in remortgaging your property but unsure where to start, CLICK HERE for more information.
First-time buyers: I am a first-time buyer, how will interest rate increases affect me?
Some first time buyers could now feel a little wary about taking out a mortgage, with the potential extra costs due to higher interest rates. Some buyers may even want to put plans to buy a home on hold for the time being.
With the rate of inflation on the rise, leading to more and more increases in interest rates, the longer buyers wait the more they will risk paying long term.
The best plan of action if committed to taking out a mortgage would be to do this sooner rather than later to avoid increasing costs. If concerned about pricing, it is a good idea to check and compare prices across lenders to secure the cheapest deal possible.
For more information about securing a great mortgage as a first time buyer CLICK HERE.
For information about first time buyer mortgages with only a 5% deposit CLICK HERE.
Fixed rate mortgages: is the interest rate increase something to worry about?
With a fixed rate mortgage, it is possible to fix the cost of monthly mortgage repayments for a set number of years usually 2, 5 or 10 years. About 75% of mortgages in the UK are on a fixed rate.
This is a popular choice for buyers as they are guaranteed a set price, allowing people to plan their finances years in advance. A fixed rate mortgage allows for peace of mind knowing prices will remain steady throughout the fixed rate period.
However, any borrower near the end of their fixed rate agreement with a lender may be concerned, as when the fixed term ends, they will automatically be moved to the lender’s standard variable rate (SVR).
With an increase in interest rates, this could lead to the amount borrowers pay every month going up significantly if a good rate was secured in the initial agreement with the lender.
With this in mind, it is worth speaking to an adviser before a fixed rate mortgage term runs out. There are ways around extreme price increases, with the best option being a remortgage to a new mortgage with better rates.
For more information about fixed rate mortgages CLICK HERE.
Standard Variable Rate (SVR) and tracker mortgages: you may be able to remortgage and get a better deal
A Standard Variable Rate (SVR) mortgage refers to a mortgage where the monthly repayments on the loan could increase or decrease depending on the lender’s standard base rate of interest at the time.
With interest rates now rising, this could affect anyone with an SVR mortgage in place. Roughly 21% of homeowners in the UK have a Standard Variable Rate mortgage.
Unlike a tracker mortgage which is tied directly to the Bank of England’s base rate, with an SVR mortgage the particular lender can change the standard base rate of interest they charge at their own discretion. With interest rates rising, these lenders are very likely to increase their prices, but by how much will depend on the individual provider.
Anyone on a tracker rate mortgage can expect price increases for certain in line with the Bank of England increases, as these mortgages will always charge the Bank of England’s base rate.
However, there are still options for people with these mortgage types. Speak to the mortgage lender as negotiation is most likely an option. Increases in rates do not have to be blindly accepted without question. Some lenders may be able to offer a better rate for existing customers.
The option to remortgage is always there and sometimes this will allow for swapping to a deal that has more favourable payment rates long term. Consider talking to a mortgage specialist to find out if there are lenders with better rates available.
When will banks increase interest rates again?
It is hard to predict an exact timeline for this, but it is likely interest rates will rise again. Interest rates have been on a steady upward climb for months and the UK has been predicted to be in a recession by the end of the year, according to the Bank of England (BoE).
Inflation is currently just above 9% and expected to rise to more than 13% before the end of the year. With such a direct correlation between inflation and interest rates, it is to be expected that the Bank of England will approve a further increase if things do not improve.
With this in mind, it is essential to put provisions in place where possible, to try and cut costs to avoid financial difficulty. This could be cutting out several smaller expenses such as gym memberships/streaming services etc or readjusting a bigger expense like your mortgage.
If you need advice on the best options for your mortgage, get in touch with our team today. We are experts in this industry and dedicated to helping people secure the mortgage that is perfect for them.
Below we have linked some helpful resources with further information on this subject: