RATE EXPECTATIONS
After the Bank of England’s 0.25% rise, we look at what effect the move will have for homeowners’ mortgage repayments
For the first time in a decade, homeowners with mortgages have a new reality – interest rates rising with the Bank of England base rate increasing by 0.25% to 0.5%.
Few economists believe this is the end of upwards moves with more rises likely over the coming months.
Which? research shows 42% of home buyers have never experienced a rate rise. So here’s the key number mortgage payers need.
For every £100,000 outstanding, each 0.25% increase adds around £20 to monthly outlay. If you borrowed £200,000, the extra interest will push up payments by around £500 a year or £40 a month, and if your loan is £400,000 – common in London and the South-east – an extra 0.25% means nearly £1,000 a year in additional costs. Not everyone is affected equally however, or at least not for the moment. Those on fixed rates need not worry for the moment. Crunch time comes later. They will continue to pay the same for the length of the contract. When that expires, they could find rates have risen – although if they have paid off a chunk of the original loan, their monthly expenditure might not change that much. Those hardest hit by an increase – and it could be as soon as the month following the interest rate rise – are those on tracker and standard variable rate mortgages where rates go up and down directly according to interest rates. If the level goes up 0.25%, they pay that much more. Should it fall, they would pay less.
This is where homebuyers need to look at the small print.
A number of trackers are directly linked to the Bank of England rate – some are mortgages that were taken out 10 or more years ago when interest costs were much higher.
Many new loans linked directly to Bank of England rates have a time limit such as the two-year deal from Nationwide at bank base rate plus 1.19% although some lenders, such as Hinckley & Rugby Building Society, have base rate trackers for the life of the loan. Others track the lender’s “standard variable rate” – this is also the “go-to” rate after deals expire.
Lenders are free to raise or lower this as they wish – but most act roughly in line thanks to competitive pressures.
For first time buyers, there is a glimmer of better news.
Interest rate rises tend to dampen down house prices so that dream home might just become more affordable – provided they can find the deposit.