Bank of England inflation interest rates 2021: what mortgage borrowers and first-time buyers need to know

·3-min read
 (Daniel Lynch)
(Daniel Lynch)

It has been clear for some time that when it comes to interest rates, to quote Eighties popster Yazz, the only way is up.

The only question was, when would the long slow march back up the hill towards “normal” borrowing costs begin?

Well now we know the answer; following the Bank of England’s decision to hike its rate by 0.15 per cent to 0.25 per cent after sitting at a record low of 0.1 per cent since the start of the pandemic in March last year.

So what does it mean for borrowers and first time buyers?

For the vast majority of existing mortgage holders, precisely nothing, at least in the short to medium term.

That’s because almost three quarters of home loans in the UK are locked into fixed rates, and about half of them for five years. Over the past two years 96 per cent of new mortgages have been on fixed rates.

However, if you have less than six months left on your fixed rate deal, now is probably the time to start shopping around for your next one.

That is because while today’s rate hike was largely “priced in” by the mortgages and financial market now all eyes will start turning towards the next one.

With inflation “running hot” at 5.1 per cent and likely to break through to thirty year highs of six per cent or more early in 2022, it is a question of when, not if, the Bank will act again.

Borrowers with six months or less on their fixed period can reserve a new deal to replace it when it expires.

How long should I fix my mortgage for now?

The question is how long they want to fix for next time. Ray Boulger, senior technical manager at broker John Charcol reckons that with the gap between two and five year deals so narrow borrowers may as well go for the longer option.

Alternatively, if you want real peace of mind go for a super long term fix for ten, 25 years or even 30 years with specialist lenders such as Kensington Mortgages or Perenna.

Rates start at below three per cent but check on what penalties you would have to incur for early repayment.

What if I can’t afford higher mortgage payments?

According to Charles Roe, Director of Mortgages at trade body UK Finance, said: “For those who have come to the end of their deal, a wide range of mortgage products are available and we encourage homeowners to shop around and choose the best one for their circumstances.

“Any customers with concerns about managing their mortgage should contact their lender who will be able to explore the range of individual support options available."

For borrowers on tracker and variable rate mortgages, the bad news is that your bills will now go up, though a 0.15 per cent rise means any increase will be marginal. But there are certain to be more on the way so this might be the moment to lock in before the cheapest deals start to melt away.

David Beard, CEO and personal finance expert of financial comparison site,, said: “If your mortgage isn’t on a fixed-rate, first, find out how much your monthly repayments will increase by. If you can’t afford to pay extra, don’t be a sitting duck; talk to your lender ASAP about your options, so you don’t run into trouble down the line. The worst thing you can do is stick your head in the sand”.

For first time buyers these are still extraordinary times with market rates only just above their all-time lows. Even for buyers with small deposits of five per cent the options are better than they were a few year ago with plenty of choice at around the three per cent interest rate mark.

With house prices likely to carry on rising at a modest pace it might make sense to take the hit on a slightly more expensive interest rate now rather than slog away saving for years more to reach the next LTV band.

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