The increase in the Bank of England’s base rate will mean the annual cost of a standard variable rate mortgage has risen by £650 in less than two months, according to a broker.
The BofE has announced an 0.25 per cent increase in the base rate, taking it from 0.25 per cent to 0.5 per cent – a move intended to curb rising inflation.
It comes on the back of a previous rise from 0.1 per cent to 0.25 per cent on 16 December.
Climbing costs: The Bank of England has increased its base rate, and those on standard variable mortgage rates and trackers are likely to see their interest payments go up, too
Online mortgage broker Trussle has calculated that this latest increase could add a further £331.56 on to the average mortgage annually.
It means that homeowners on their lender’s standard variable rate would have seen their annual mortgage payments increase by an average of £656.04 compared with December 2021, or nearly £55 per month.
While the SVR is not directly linked to the BofE base rate, high-street banks often increase their SVR in line with it – though borrowers will have to wait and see what their lender decides to do.
Within hours of the Bank of England’s announcement, Nationwide announced that it will increase its SVR by 0.25 per cent from 1 March.
SVRs and trackers account for 20 to 25 per cent of existing mortgage holders, depending on which estimate you look at.
According to UK Finance figures, there are around 1.1million people on SVRs.
There are also 850,000 people on tracker rates, and these will see their rates increase from their next payment.
‘Today’s rise will be a signal to homebuyers that rates will inevitably rise and that this may now happen earlier than anticipated,’ said Lucian Cook, head of residential research at estate agent Savills.
Standard variable rate, tracker or fixed: How are they affected?
Brian Murphy, head of lending at the Mortgage Advice Bureau, explains:
Standard variable rates: Those who are on lender revert rates or Standard Variable Rates (SVRs) will have to wait and see if their lender will pass on the rate increase in full or only in part.
Trackers: Those who have a tracker rate mortgage are more likely to see the rate passed on in full, and possibly as soon as their next mortgage payment
Fixed rate: A fixed rate mortgage could provide a temporary safe haven against upcoming interest rate rises as their fixed interest rates are guaranteed for a set time period.
If you’re remortgaging, make sure to speak to your lender about your mortgage terms as there may be exit fees or early repayment charges to consider.
‘The mortgage market remains very competitive and lender margins have tightened over the course of the pandemic. As such, we could see today’s rate rise passed on to borrowers in full.’
Lenders have been increasing mortgage rates across the board since the first base rate rise. Rates on fixed mortgages have been edging up for several months after hitting record lows of as little as 0.84 per cent in summer 2021.
Assuming fixed rate mortgages rise in line with the base rate, taking out a typical fixed £150,000 loan over 25 years would cost an extra £21 a month, or £252 a year, according to figures from broker L&C.
Fixed mortgage rates are currently at levels similar to what they were prior to the pandemic.
But borrowers are being warned that they could rise rapidly.
If the base rate increased to 1.5 per cent by the end of 2022, as some City analysts are predict, they would pay an extra £1,272 a year.
Katie Brain, banking expert at Defaqto said: ‘Fixed rate mortgages are at very similar rates to what they were pre-pandemic, for example the best five year fixed rate mortgage for a house purchase with a 20 per cent deposit is currently 1.69 per cent compared to 1.76 per cent two years ago.
‘[But] is imperative that people review their mortgage if they are on a variable rate mortgage, or are coming out of a fixed rate deal, because although interest rates are still competitive to what they were two years ago, they will start rising.
‘Take advantage of these rates whilst you can. Seek professional mortgage advice to find the best solution for your circumstances.’
> Find the best rates for you using the This is Money mortgage service
But even if they rise, fixed interest rates are still much lower than variable ones in most cases – and experts say there are currently still good deals to be had.
Higher mortgage rates will add to the rising cost of living, which could stall house price growth
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘As lenders seek to create opportunity and/or cater for demand, not all rates are on the rise; indeed we have seen longer-term fixes fall.
‘Furthermore, while the cost of lower loan-to-value mortgages has risen, the same cannot be said for lower-deposit products.
‘It should be remembered rates are still historically low and there are good deals to be had if you shop around.’
‘Borrowers may be able to reserve rates for up to six months, therefore hedging against further mortgage rate increases.’
Experts are warning the large numbers of homeowners who took out two-year fixed rate mortgages during the stamp duty holiday in summer 2020 to start shopping around, as they are already nearing the end of their mortgage terms.
What impact will rate rise have on house prices?
Experts have also warned that increasing mortgage rates may serve to dampen the buoyant housing market.
Many households are already struggling with the cost of living, and the prospect of more expensive mortgage payments combined with other factors such as today’s rise in the Ofgem energy cap could lead them to put off trading up the housing ladder.
Heather Owen, financial planning expert at Quilter, said: ‘While the property market was seemingly undeterred by the previous rate hike, with prices growing ever higher, a further increase and more expensive mortgages could have the potential to slow the seemingly never-ending increase in house prices.’
Agent Savills has reaffirmed its forecast of 3.5 per cent house price growth for 2022, less than the roughly 10 per cent seen in 2022, but Cook said price growth would be ‘weighted towards the first half of the year’.
‘This will put a bit of a squeeze on household finances and affordability,’ he said.
‘However some of the underlying economics of the housing market remains on hold: it’s currently less about affordability and more about supply and demand, and the extreme shortage of stock and high levels of demand will likely sustain some further house price growth, particularly given the high levels of equity in the market.’
One group that might be particularly affected is first-time buyers. Rising house prices in the past year mean they have to save higher deposits, and the cost of living is adding further pressure to their budgets.
Both of these make them less likely to be able to afford higher mortgage rates.
How to cut cost of your mortgage
The Mortgage Advice Bureau’s Brian Murphy shares his top tips on what homeowners should consider to help manage an interest rate rise.
Remortgaging now – if they are able to do so without punitive fees – could save borrowers money in the long term
If you’re in a position to remortgage, don’t wait around: It’s not uncommon to find that any hint of an increase can impact the market and therefore what mortgage deals are on offer and for how long. The sooner consumers act, the more likely they will be to secure a rate close to the lowest ever levels.
Use a broker: Whether you’re a new buyer or looking to remortgage, make sure you shop around. A mortgage broker can help you find the most suitable deal for your circumstances and factor in true costs. It’s important to not only think about headline rates, but also assess any additional fees that may be involved.
Budget for the increase: Creating a budget based on your income and outgoings will help you to see any areas where you can potentially cut back on and make some savings, either to help boost your deposit or assess if you can overpay your mortgage. It can also help you create a savings buffer should any unexpected financial costs or bills arise in the future.
Consider overpaying to save long-term: As mortgage interest accrues on the full amount of your mortgage over its entire term, consider overpaying to reduce the amount on which interest is charged. Doing so may help not only pay off your mortgage debt faster, but also be a big money saver in the long run.
For example, if you have a £100,000 mortgage over 25 years with an interest rate of 4 per cent, and you pay off an extra £100 a month, you could reduce your mortgage term by six years and save £15,534 on interest. Keep in mind though whether you can overpay on your mortgage without a penalty. A 10 per cent overpayment facility per annum without incurring penalties is fairly typical of many products.
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