After over a decade of record lows, interest rates have been climbing sharply with each successive Bank of England meeting.
The fall out from the mini budget caused many lenders withdraw their mortgage products from sale and only this week have introduced new products at considerably higher rates.
According to Moneyfacts, the average rate to lock in your payments on a 2 year fixed mortgage now costs as much as 5.97% with no indication rates will fall in the near future.
As we dive into the impact of rising interest rates, let’s begin by answering some common questions:
Why Do Interest Rates Rise?
Interest rates are, in the words of Laura Howard writing for Forbes, “used as a tool for the Bank of England to curb rising inflation”. When inflation rises too much:
- Costs of products skyrocket and become unaffordable to the average family
- Taxes rise because earners are pushed into higher tax brackets without seeing more money in actuality, this is known as fiscal drag
- Export levels lower because other countries don’t way to pay more for their products although this can be offset by a weaker currency
- The British pound looks less attractive to investors, reducing it’s strength relative to the US dollar and increasing the cost of imported goods
And much more.
When the Bank of England raises the base rate (and therefore affects many different UK interest rates), the cost of borrowing goes up, and people start to spend less.
When people start to spend less, inflation rates reduce.
Eight times a year, The Bank of England’s Monetary Policy Committee meets to discuss whether they will hold the base rate, move the base rate up or move it down (and by how much they’ll move it if they do). Inflation is a key consideration in this meeting.
The most recent meeting was postponed for a week due to the death of The Queen but the remaining dates for this year are:
And the provisional dates for next year are:
|Thursday 2 February
|February MPC Summary and minutes and February Monetary Policy Report
|Thursday 23 March
|March MPC Summary and minutes
|Thursday 11 May
|May MPC Summary and minutes and May Monetary Policy Report
|Thursday 22 June
|June MPC Summary and minutes
|Thursday 3 August
|August MPC Summary and minutes and August Monetary Policy Report
|Thursday 21 September
|September MPC Summary and minutes
|Thursday 2 November
|November MPC Summary and minutes and November Monetary Policy Report
|Thursday 14 December
|December MPC Summary and minutes
It is likely at these coming meetings, rates will continue to rise to combat rising inflation which according to the investment bank Goldman Sachs could hit an eye-watering 22% next year.
The Impact of Rising Interest Rates on Mortgages
The impact of rising interest rates is perhaps not that evident if you’re already locked into a fixed rate mortgage but you will notice the difference when it comes to remortgage.
If you don’t have a fixed rate mortgage you will likely see your mortgage becoming more expensive, though the specifics will be down to the individual rate you’re paying and the cost of your loan.
A borrower that secured £200,000 25 year mortgage on a two year fixed rate at 1.29% will have been paying at £780 per month.
The same borrower remortgaging a remaining balance of approximately £186,250 over 23 years at 5.97% would be paying £1,285 per month – a hike of £505 per month.
If you are within 6 months of your current mortgage date, we will be able to book a new mortgage for you at todays rates – if rates do fall in the meantime we can switch the product.
If rates go up you will have secured a lower rate than will be available in the future.
Managing Rising Interest Rates
When news breaks about a potential rise in the base rate, it’s natural to feel a little panicked – whether you’re an existing homeowner or someone on the brink of buying your first property, this change will impact you.
Existing homeowners, you should:
- Fully understand your mortgage, and fully understand what YOU should expect
If you don’t know which type of mortgage you have, look to your paperwork or make a quick call to your mortgage provider. Simple money calculators available online can help you to gain a good estimate of how your costs will change with your rates.
The key is that, rather than jumping into news articles describing worst case price hike scenarios, you focus solely on your individual situation, and on determining what you need to know and what you can now be expecting to pay.
- Determine whether you need to cut back before the impact really hits your bank account
Advance planning is a must in this type of situation, and once you’ve completed step one, it’ll be time to frankly assess your incomings and outgoings to see whether you’ll need to make some lifestyle changes in preparation for an increased mortgage expense.
If you do feel that things are on the borderline, set a budget and cut back on the non-essentials right away. Begin the important process of building a savings buffer.
If you feel unable to do this and are concerned about continuing to afford your mortgage, reach out to a debt adviser (also right away). Seeking advice isn’t admitting defeat – it’s working hard to avoid it.
- Overpay your mortgage
Obviously, this only applies if you’re in a position to do so, but if you are, it’ll be helpful to take advantage of the low rate while it’s still around.
There are limits to the amount you can overpay and charges might be incurred if you overpay above a certain amount, but even so, it might remain worth it to cover the charges.
Check in with your mortgage provider, communicate your intentions, and avoid being penalised for punctuality if at all possible.
First-time buyers on the brink of a purchase, you should:
- Check (and work on improving) your credit score
As we just told homeowners: Knowledge is power. Full understanding is crucial. That’s why you should find out your credit score ahead of trying to get yourself a mortgage.
A solid credit score will allow you to access a much better deal and see you approved for preferable mortgages, especially when rates are high and competition is steep.
If you know your credit score and you’re aware it could use some improvement, you can then get to work on this.
- Seek advice to ensure you’re choosing the best deal
Nobody can know everything, and if you’re not a mortgage expert, some of the legalese is bound to go over your head. Don’t feel defeated by this, but also, don’t agree to things you don’t fully understand. Seek professional advice if you need to.
There are many knowledgeable experts out there, waiting to help you navigate the purchase of your first home. In fact, many advisers will offer you some of their services free of charge if you’re a first-time buyer!
Concerned about how interest rates could impact your mortgage? Don’t hesitate to get in touch. A member of our team would be delighted to help you.
Your home may be repossessed if you do not keep up repayments on a mortgage secured on it.
Think carefully before securing additional debts against your home. If you are thinking of consolidating existing borrowing you should be aware that you may be extending the terms of the debt and increasing the total amount that you repay.
The content in this article was correct on 05/10/2022.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, mortgages and mortgages for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an adviser and see how we can help you.