In a bid to bring inflation down, the Bank of England has increased interest rates several times consecutively in 2022. This article details how interest rates rising could affect you and your mortgage.
Why does inflation affect interest rates?
As Covid restrictions eased, consumers begun spending more quickly. With high demand putting pressure on good supply, prices have increased globally. Additionally, the costs of gas and oil have risen sharply; an issue worsened by the Ukraine invasion.
On top of international goods and energy price hikes, pressures within the UK have added to the rise of inflation. Currently, there aren't enough people to fill the number of job vacancies, putting upward pressure on the wages employers must offer to compete for new staff.
Inflation is essentially another word for rising prices, so when prices rise, so too does the rate of inflation. Left unaddressed, the economy will continue to grow too fast, creating an inevitable recession.
The theory is that by raising interest rates, the cost of borrowing goes up, forcing us to save more and spend less, thus gradually cooling inflation.
How will the interest rate increase affect you?
How and if the rate rise will affect you depends on your financial circumstances. If you have significant savings in a bank account, interest rate rises may work in your favour, so long as your savings institution passes on the increase.
For first-time buyers or hopeful homeowners wanting to get on the property ladder, the rise in interest rates equates to higher mortgage costs.
Grainne Gilmore, head of research at Zoopla, explains: “For buyers with a 30% deposit buying an average priced home of £250,000 in the UK, a quarter point rise in mortgage rates will add hundreds [£264] to their annual mortgage bill.”
How does the interest rate increase affect my mortgage?
If you already have a mortgage, it's highly likely that your bank will increase your mortgage interest rate.
Sarah Thompson, Managing Director at Mortgage Scout, comments:
“Those not on fixed mortgages are going to be hit hardest. Rising living costs and inflation mean that people are going to have to be smart when it comes to saving money. Save where possible and don’t be afraid to ask for help from a mortgage expert – this will be key in helping people navigate what looks set to be a tough period for the country due to rising inflation.”
Luckily, most homeowners are currently on a fixed interest rate mortgage, so won't be affected by any changes until the end of the fixed term. However, if you have a mortgage (or other loan) that charges interest at a variable rate, your repayments are likely to increase. Those on standard variable rates or tracker mortgages will unfortunately be hit hard by the rate increase.
As an example of what you can expect, if you have a 25-year mortgage of £125,000 at an interest rate of 2.5%, your monthly repayments would be £560. However, if this interest rate rises by 0.25%, your monthly repayment would increase by £16 to £576.
It's important to foresee how changes to interest rates may affect your ability to make your repayments.
Changes in interest rates can also affect repayments on loans such as car loans, personal loans, and credit cards, so be sure to consider these in your budgeting as well.
Does the interest rate increase affect my mortgage if it’s fixed?
If you currently have a fixed mortgage, you will not experience any immediate changes. Still, your loan will revert to a variable rate once the fixed term ends, and you will have to decide whether to re-fix your loan or remain on a variable rate.
Some borrowers with only a short time left of their fixed period opt to pay the penalty to remortgage before the end of the term and lock in another fixed term rate before they climb any higher. If your fixed term is nearing its end, it would be prudent to consult with a mortgage broker to discuss your options.
What should I do if the interest rate increases and I’m looking to buy a home in the near future?
Sarah Thompson, Managing Director at Mortgage Scout, gives advice for those looking to get on the property ladder:
“It is important to remind anyone looking to buy a home in the near future that they should ensure they do their research and secure a mortgage as quickly as possible. We are seeing lenders changing rates, criteria and affordability. When interest rates change, it always creates a flurry of new applications, leading to a backlog that can take weeks to clear.”
Will interest rates continue to rise?
The short answer is yes; further interest rate rises are virtually inevitable to bring the rate of inflation down and protect the economy. The big question is, by how much must they rise to regain balance.
Expert analysts at Capital Economics assert that the Bank of England will need to bring rates up to at least 3% to sufficiently cool inflation.
Sarah comments, “Although borrowing rates are continuing to rise, this is not the highest we have seen in our lifetime. People who are hoping to buy should not wait for rates to drop or the housing market to dip; if you have found a property or are looking to remortgage in the next 6 months, you can and should secure a rate today, as we predict further rate increases this year. Waiting around could lead to disappointment – be it a higher rate of borrowing, or the loss of your dream home to another buyer willing to act quicker.”
Are interest rates only rising in the UK?
While globally rising prices impact the UK, many other countries are in the same boat, and also increasing their interest rates in a bid to slow inflation.
Australia, Canada, Switzerland, India, and Brazil have all raised their interest rates, and the US central bank recently announced its largest rate rise in nearly three decades. The European Central Bank has also indicated its plans to raise rates later in the year.
This is good news for Brits, as the less pressure international economies are under, the less upward pressure there is to continually hike up prices.
Consider remortgaging
If your current mortgage rate is coming to an end or you think you could get a better deal, consider remortgaging. Our friendly experts are here to help whether you’re a first time buyer, homeowner, or landlord. Book a free consultation with us here.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1%, but a typical fee is 0.3% of the amount borrowed.
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