How December’s base rate rise affects your mortgage

·5-min read
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The Bank of England (BoE) has raised UK interest rates to 0.25%. The move caught City forecasters unawares and follows on the back of a sharp rise in November’s inflation rate and against a backdrop of a surge in the Covid-19 Omicron variant.

Mortgage customers with a home loan linked to the base rate are likely to end up paying more as a result of today’s announcement.

At its last rate-setting meeting of 2021, the BoE’s Monetary Policy Committee voted overwhelmingly to raise the base rate by 0.15 percentage points from its historic low of 0.1%. The rise marks the first rate increase in nearly three years.

Inflation – as measured by the Consumer Prices Index – stood at a heady 5.1% in the 12 months to November 2021, more than double its 2% target set by the government. The increase has largely been due to a combination of soaring energy costs and pressure on supply chains since trade re-opened post-Covid.

What does a rate rise mean for home loans?

A base rate rise has been on the cards for several months. Although customers with fixed-rate mortgages are shielded for the duration of their arrangement, an upward movement in the base rate can add extra costs to homeowners that have taken out variable rate mortgages.

These include mortgage customers on standard variable rate deals and also tracker products. New mortgage deals had already factored in a rise.

Winkworth, one of London’s largest chain of estate agents, said: “Even a small rate increase can have a marked effect on mortgage repayments that track the base rate… it makes a big difference to people’s budgets.”

For example, if the rate on a £200,000 repayment tracker mortgage taken over 25 years were to rise from 3.5% to 4%, monthly payments would go up by an immediate £53.

Borrowers on fixed rate loans will be sheltered for the duration of the fixed term. But the deals available whenever they expire will be dearer. Lenders take their cue from movements in the base rate and many are likely to pass on this latest news to their customers.

The MPC next meets in February 2022 and another rate hike is not out of the question. In response to December’s hike in rates, the BoE said: “Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressure is unclear at this stage.”

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Sarah Coles, personal finance analyst at Hargreaves Lansdown, said homeowners should start locking in better deals now: “If you’re on a variable rate deal, your rate is likely to increase with any BoE change. So, you may want to consider bagging a fixed deal before any changes kick in, and while there are some bargains around. It’s worth lining up a deal sooner rather than later, because when banks are convinced rises are on the way, fixed mortgage rates will go up before any announcement.”

The good news is that mortgage customers with less than six months to run on a fixed deal can start shopping around for a new home loan now. That’s because lenders allow you to lock in a rate up to half a year in advance.

It’s also worth exploring how much a rate rise could affect your future payments. This provides you with some breathing space to plan for how you could stretch your budget to cover a bigger monthly payment, should one be needed when your present deal finishes.

Impact of rate rises on mortgage repayments

We asked Hargreaves Lansdown to produce some figures reflecting how a rise in interest rates would affect typical mortgage repayments. The example tables below show two scenarios, one for a typical variable rate mortgage and the other for a fixed rate arrangement.

To reflect today’s announcement, we’ve assumed a rate rise to 0.25% this December and then another upward move, of 0.25 percentage points, taking the overall rate to 0.5% in early 2022.

The figures assume a mortgage with 20 years left to run for the average London house price of £495,000.

Table 1 assumes an average variable rate mortgage of 2.32%, while table 2 shows repayments based on an average fixed rate mortgage of 1.99%.

Both rates reflect the average rates on outstanding property stock. In other words, the rates homeowners currently have, rather than the average rates available on new loans.

From the figures, monthly mortgage payments could be as much as £88 per month higher next spring.

Ms Coles said: “The gradual rate of change might lull homeowners into a false sense of security, because it might not feel like too much of a stretch to find £33 more in the monthly budget. However, the cumulative effect of rate rises can be devastating and, in a few months, if your mortgage payments are £88 higher, life could be much more difficult financially.”

Table 1: example mortgage repayments, assumed variable rate of 2.32%

Mortgage size

£450,000

£400,000

£300,000

£200,000

Current monthly mortgage payment/£

2,345

2,085

1,564

1,042

Monthly payment & increase/£ assuming 0.15 percentage point rise

2,378 (+33)

2,114 (+29)

1,585 (+21)

1,057 (+15)

Monthly payment & increase/£ assuming 0.4 percentage point rise

2,433 (+88)

2,163 (+78)

1,622 (+58)

1,081 (+39)

Table 2: example mortgage repayments, assumed fixed rate of 1.99%

Mortgage size

£450,000

£400,000

£300,00

£200,000

Current monthly mortgage payment/£

2,274

2,022

1,516

1,011

Monthly payment & increase/£ assuming 0.15 percentage point rise

2,306 (+32)

2,050 (+28)

1,538 (+22)

1,025 (+14)

Monthly payment & increase/£ assuming 0.4 percentage point rise

2,361 (+87)

2,098 (+76)

1,552 (+36)

1,035 (+24)

Source: Hargreaves Lansdown

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