18 May Worried about rising mortgage rates
A look at how changing rates affect your mortgage
Are you worried about rising mortgage rates and how you can protect yourself? Find out how interest rates work and what it means for you.
What’s going to happen with interest rates in 2022?
It’s the Bank of England’s job to set interest rates in the UK – known as the Bank Rate or sometimes the base rate. It’s a way to try and control inflation and the economy.
Bank Rates impact how much interest we get on our savings. In addition, it affects the rate at which we can borrow on mortgages and other forms of credit.
The Bank of England base rate has been historically low for more than a decade – meaning people have enjoyed low borrowing costs – but things are changing.
Since 2009, when they were cut to just 0.5% in response to the financial crisis, interest rates have been extremely low. Between March 2020 and December 2021, they hit a record low of 0.1% (to help the economy during the Coronavirus pandemic).
To curb inflation, the Bank of England has started increasing the Bank Rate. In December 2021, February 2022, March 2022, and May 2022, the Bank Rate shot up. The upward trend is expected to continue in 2022.
But how do interest rates work and how can you keep your monthly mortgage payments from going up?
Bank of England (Bank Rate) is what other banks and building societies use to set their lending (and savings) rates for their customers. Mortgages and loans have interest, and this is sometimes referred to as borrowing costs.
What is an interest rate?
What’s the interest rate at the Bank of England?
The Bank of England Bank Rate is determined by the Monetary Policy Committee (MPC) – an independent group of economists.
They watch how the economy is doing and how much inflation there is. Each month they decide what the base rate is. In the UK, other banks and building societies set interest rates based on this decision. It will influence how much you pay in interest.
It’s the Bank of England’s job to push banks and lenders to increase the rate they charge borrowers if it raises the Bank Rate. That includes mortgage rates.
How come interest rates are rising?
Higher interest rates mean consumers will get more money back on their savings. That means they’ll be more likely to save. In addition, it would encourage them to borrow less because loans (including mortgages) and credit are more expensive. It would also slow the price hikes on goods and services.
What effect do interest rates have on my mortgage?
Mortgages get more expensive if interest rates increase.
If the Bank Rate moves up, lenders pass the cost on to their customers.
So, your mortgage will be more expensive.
If you’re buying a house or remortgaging, you might want to consider a fixed-rate deal to lock in a low rate for a few years and protect yourself from rising rates.
What will happen if interest rates rise?
If you’re on a tracker mortgage – a mortgage that tracks the Bank of England’s Bank Rate – your mortgage rate will rise with any increase in interest rates.
If you’re on a variable mortgage, such as a discounted variable rate or standard variable rate, the rate may fluctuate with the Bank of England Bank Rate. However, it’s also at the lender’s discretion. Depending on the lender, the lender may pass on a bigger rate increase, or the rate increase may be less than the change in the Bank Rate.
How will my mortgage payments be in 2022?
Your rate and payments won’t change if you’re on a fixed-rate mortgage. You’ve negotiated your rate for a set period. But once this fixed-rate deal ends, you might find new fixed-rate deals are much higher than your last one.
If you have a tracker mortgage, your repayments will move up if the Bank of England rate increases – and so you may see your rate and payments rise even more this year.
Borrowers should be aware that even a small increase in the Bank Rate can increase your mortgage costs significantly.
On a tracker mortgage, if the Bank of England raises interest rates by 0.5%, that’ll add £56 a month to a 25-year £200,000 mortgage. That’ll come to £672 over a year.
What can I do to protect myself from rising interest rates?
The most effective way to protect yourself from rising rates if you’re on a variable rate mortgage is to move to a fixed-rate mortgage. Most times, this is the preferred option since you can lock in a lower rate for two, three, or even five years, depending on what you need.
Lenders typically pull the most attractive fixed-rate deals at the first hint of an interest rate hike, so you need to act quickly. But be careful before making any moves to make sure you don’t incur any fees.
If you leave a standard variable rate mortgage, you shouldn’t be penalised, but moving to a fixed rate mortgage might cost you an arrangement fee. Also, remember valuations and conveyancing fees.
Make sure you’re prepared if you’re on a fixed rate. You can get a new mortgage deal in advance if your term is less than six months. Get a new deal now.
Consider a five-year or even 10-year fixed rate mortgage when choosing a new mortgage. Just don’t fix it for longer than you’re comfortable with. If you move house or restructure your loan within the fixed-rate period, there might be early exit penalties.
What can I do to keep my mortgage costs down?
Keeping your mortgage costs low and affordable is easy if you know what to do.
You should save up as much money as you can for your deposit if you’re a first-time buyer. So, you’ll need a smaller mortgage and a reduced loan-to-value (LTV). If you have a lower LTV, you’ll get better rates.
You will also be able to get better rates if you remortgage (switch to a new mortgage deal) and now have a lower LTV than before.
You might want to switch to a fixed rate if you’re worried about rising interest rates. When the Bank Rate moves up, your monthly payments won’t keep climbing up.
Depending on what rate you’re paying, you might be able to save by switching to another fixed rate. Don’t decide before checking if you’ll get penalized for early repayment.
Speak to your lender as soon as possible if you’re worried about your mortgage costs. You might be able to find a way to make your payments more manageable by restructuring the debt (increasing the term to make monthly payments smaller, for example) or taking a short-term payment holiday if necessary.
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