What does today’s interest rate rise mean for borrowers?
Today, the Bank of England’s Monetary Policy Committee made their much-vaunted decision to increase their central interest rate by 0.25 per cent – to 0.5 per cent.
The rate had remained at its unprecedented low of 0.25 per cent since August 2016.
This change will have an immediate impact on anyone with a variable rate or tracker mortgage. For example, it will add £28.72 to the monthly payment on a £200,000 mortgage with 25 years left on the term. This increase would be multiplied every time there was any further increase in rates. So, for example, if the Base Rate was to rise four times, to 1 per cent, it would cost someone in the above scenario £117.10 a month.
Although most mortgages lent in the UK over the past five years, have been fixed rate deals, an estimated five million people are stuck on their lenders’ standard variable rates and therefore affected by the change.
What should borrowers do now?
First and foremost – don’t panic!
Because this rise has been expected for a while, most lenders have already nudged up their mortgage product rates in anticipation. So it’s unlikely that the mortgage deals available out there will suddenly become dramatically more expensive.
However, in our view, this is the beginning of an upward trend, which will see the cost of mortgages very gradually return to more ‘normal’ levels, which we haven’t now seen for a decade, since the onset of the Credit Crunch changed the financial landscape forever.
Traditionally, an average mortgage rate would have been closer to five per cent, but it’s so long since we’ve seen this – and many current borrowers can’t even remember a time when it was like that - that there’s a danger people have started to become a little complacent, and used to the added spending power ultra-low mortgage costs have given them.
Why are interest rates rising?
Interest rates act like a lever the ‘Powers that Be’ can use to accelerate or put the breaks on our economy. The higher they are, the less people are able to spend and the less likely inflation is to get out of hand. The lower, the greater the possibility that people will rush to spend their free cash on the latest gadget, the more the economy booms and then inflation starts to creep up because wages and other things creep up to keep pace, and so it spirals.
Our economy was so broken as a result of the credit crunch of 2008, that as well as printing money through so-called ‘quantitative easing’, the Bank of England had to reduce its rate to almost zero as a drastic defibrillation of a dying market. And several years on, they remained so unsure whether it was having the desired effect, last August they reduced it down further, to the current 0.25% from the 5% point it had occupied for almost eight years.
Factors influencing the Committee’s decisions include the continued threats to our economy posed by everything from Brexit to the mind-boggling worldwide possibility of a new-style nuclear threat. Basically, the financial markets don’t like any kind of risk, and our economy remains so unstable that the Bank of England treads a fine line in helping us to withstand further shocks.
However, if they were to keep rates low for too long, there’s a risk they could over-stimulate the economy, and that would create a spike in inflation that wouldn’t be good for anyone. Last month, the Consumer Price Index (the main indicator of inflation) was at 2.8%. This is way above the Government’s target of 2%, and they will be very keen to get this back under control.
Our top 5 tips for savvy borrowers
If your mortgage is a variable or tracker one, seek advice without delay, as you could end up paying more each month unnecessarily
Whatever deal you’re on, if it’s a year or more since you had your mortgage reviewed, get it looked at. This will give you an idea of where you stand, and what deals you are likely to be able to secure once your deal period ends
Consider carefully whether a fixed or a variable rate is best for you. For example, if certainty over your payments is important to you, you might want to consider fixing for 2, 3 or 5 years while rates remain relatively low
Change your thinking – rather than seeing any excess income as an opportunity to spend, use it to save or pay extra on your mortgage, to provide you with a cushion as interest rates start to rise
The upside of interest rate rises, is that the returns on savings accounts also go up. Saving hasn’t been so popular in recent years, because it was difficult to achieve much in the way of interest. However, that’s also starting to change, with new entrants into the market, and so it might be worth looking into what deals are out there to start building yourself a back-up fund.
If you’re concerned about the impact of mortgage rate rises on you, do our Quick Quote: www.hoocht.com/welcome/rm/ to get an idea of your mortgage eligibility and chat to us for FREE advice on your best options. You can also download our ‘The Answer’s Yes’ mortgage guide from our website www.hoocht.com to help you demystify the whole mortgage process.