On Thursday, the Bank of England raised the base rate of interest by another 0.5% taking it up to 4%. This is the tenth rise in a row and leaves the base rate at its highest level since the 2008 financial crisis.
Tim Leonard, Personal Finance Expert at NerdWallet, explains what this rise might mean for homeowners and mortgage rates.
He said: “The biggest immediate impact will be on the monthly payments of those with a variable rate mortgage.
“This will include anyone with a tracker mortgage, which automatically ‘tracks’ the base rate. As a rough guide, if you’ve got a £200,000 tracker rate mortgage at 3.5% which now rises to 4%, you can expect your monthly payments to increase by around £50. If you’re sitting on your lender’s standard variable rate - or SVR - or have a discount mortgage, your lender has discretion as to whether your rate will change, but these also tend to follow the base rate.
“If you’re on a fixed-rate mortgage which has some time left to run, your payments will stay the same, as you have locked into that rate for a fixed period of time. However, if your existing fixed-rate mortgage is about to end and you want to remortgage, you’ll probably find that any new fixed rate deal will be more expensive than the one you’re about to leave.
“Even though fixed rates have been falling since the middle of October last year, they remain notably higher than a year ago. On the plus side, some experts think lenders have already factored this latest rise in the base rate into their pricing decisions, suggesting that fixed rates won’t need to rise in response. In reality, only time will tell.
“According to ONS data, just over two million households will see their fixed-term mortgage come up for renewal between December 2022 and December 2023. 57% of these households will be renewing a fixed-term mortgage rate that was fixed at a rate below 2%, meaning they could see significant increases in their mortgage payments. As an example, it’s estimated that the repayments on a £200,000 mortgage being renewed at a fixed rate of 4%, up from 2% previously, will increase by around £200 per month.
“Unfortunately, this increase in the base mortgage rate will have an impact on a homeowner’s monthly household budget. They may need to make changes to their spending habits or consider switching to a fixed-rate mortgage in order to secure a more stable monthly repayment amount.
“Homeowners are advised to speak to their mortgage lender or a financial advisor for more information and advice on the impact of the base rate increase on their individual circumstances.”
Tim has three tips for people who have a fixed rate mortgage that is coming up for renewal in 2023:
Know the rates at the beginning and end of your contract to review finances
“It’s important to know the mortgage rate you’re currently paying and the level of rate you might need to pay going forward. Using a mortgage repayment calculator will then allow you to see how much your payments could potentially increase.
“Before your current mortgage is due to expire, you should review your personal finances to determine how much you can afford to pay in increased monthly mortgage repayments. This will help you make an informed decision about the best course of action when your existing mortgage ends.”
Consider an offset mortgage
“Offset mortgages allow homeowners to reduce the amount of interest they pay on their mortgage by linking their savings account to their mortgage account. This can help to reduce the impact of an increase in your monthly mortgage repayments.
“The money in your savings isn't used to pay off your mortgage. Instead, it's used to lower the total interest you'll be charged on your repayments each month.
“However, it’s important to remember that if that money is removed from the savings account then the interest rates on these types of mortgages are often higher than what can be secured on other types of mortgages.”
Seek advice from a financial advisor
“Homeowners who are unsure about how to prepare for an increase in their monthly mortgage repayments should seek advice from a financial advisor.
“A financial advisor could help to assess individual circumstances and provide tailored advice and recommendations. They may also have access to mortgages that you might otherwise not be able to secure on your own.”
