The Bank of England last month decided to increase interest rates again but how does the interest rate rise affect you?
If you recently bought a house or just remortgaged, then this increase probably won’t affect you if your mortgage rate was ‘fixed’.
But if your mortgage tracks the ‘base rate’ or is a variable tracker then you’re more likely to be affected. Meanwhile, applying for a mortgage or remortgaging could see the cost of mortgages increasing.
The decision of the next MPC meeting (which meets monthly) will be released on 16 June. So with it coming soon, here’s what you need to know and how it may affect you, your mortgage and your decisions.
What is an interest rate rise?
Interest rates are set by the Monetary Policy Committee at the Bank of England. This rate is the interest banks pay to borrow money from the Bank of England. It is known as the ‘base rate’.
When the media reports rising interest rates, this means the Monetary Policy Committee has decided to increase the ‘base rate’.
What do banks do when rates rise?
While banks are not obliged to follow the Bank of England’s decision on interest rates, they usually increase their rates, too. Whether they do or not, it still influences the cost of borrowing and interest you earn on savings.
Interest rates and mortgages
The impact of the interest rate changes depends on the type of mortgage you have. Homeowners with a variable rate tracker mortgage that is linked to the Bank of England base rate are most likely to see an immediate increase in mortgage payments.
People with a standard variable rate mortgage are likely to see an increase in line with a rise in interest rates. The amount is decided by your lender so it isn’t guaranteed. Check your mortgage terms and conditions in your original mortgage offer document if you’re unsure. Or if you use a broker, you can always ask them to check for you.
Those with a fixed rate mortgage will be affected by rises when they reach the end of their current deal. This could make remortgaging more expensive.
When looking at remortgaging or buying a new home, think ahead about what interest rate increases might mean to you. While a 0.25% rise may sound small, if the Bank of England increases rates by this amount three or four times in a year, it soon mounts up.
For example, take a £200,000 mortgage where the current rate is 2.5% and monthly repayments are £897. This increase monthly by £25.39 to £922.62.
Bearing in mind the Bank of England says the cost of living is likely to keep rising until the end of 2023 at the earliest, that extra cost could make your mortgage unaffordable.
So, plan ahead and, if necessary, consider a cheaper property to keep your mortgage costs down.
Using a mortgage broker is advisable because they can help you understand your budget. If you would like help, speak to one of our team today.
Remember, your home may be repossessed if you do not keep up repayments on your mortgage.