From a historic low of 0.25% in 2017, the Bank of England’s interest rate has crept up to 0.75%, admittedly still a low figure, but representing a tripling of the base interest rate since last summer. If this trend continues, what could it mean for would-be homeowners or anyone looking to re-mortgage?
Why did the Bank of England increase its interest rate?
People often think the job of the Bank of England’s Monetary Policy Committee is to set the bank’s interest rates, from which all UK high street banks immediately take their cue.
In fact, setting interest rates is just a tool the committee uses to achieve its actual objective, protecting Sterling’s stability by keeping inflation as close to the Government’s 2% target as possible.
This month’s announcement, following a similar increase in November 2017, indicates concern that an accelerating British economy could lead to higher inflation.
I’m afraid that the effect of its decisions on would-be homeowners, like you, is not a major consideration of the nine-strong committee, even if does cost you money.
Swings and roundabouts, or just a slide?
An interest rate increase should be good news if you’re saving up a deposit for a house, but don’t hold your breath waiting for your bank to pass the benefit on. The high street doesn’t slavishly follow the Bank of England unless it suits it. Admittedly, base rates have been at a historic low but the average interest paid by high street banks on a typical easy-access savings account has been even lower, around 0.23%, and it’s only expected to increase to 0.3% or 0.4% after the latest announcement.
However, I suspect we’ll see an interest rate rise swiftly passed on to borrowers, meaning mortgages will get more expensive. That’s why there’s been a rush on five and ten year fixed-rate mortgages1 as borrowers seek to lock in a low rate for as long as possible, especially with further interest rate rises possible.
If yours is a fixed-rate mortgage, then the recent news won’t affect you right now, but it will when your deal ends and you’re searching for a new one.
And if you have a variable rate mortgage, according to Nationwide Building Society figures, you’ll see a modest monthly interest payment rise of around £15 a month an average mortgage of £125,0002; but who knows when the next increase will be? Historically, interest rates have been closer to 5%3; what would that do to your monthly finances?
There is one glimmer of light; if mortgages do become more expensive, house price inflation will cool. However, that’s still not a huge help to young people struggling to afford their first home.
Confused? Try talking to a mortgage broker
If you’re looking for your first mortgage to get onto the property ladder, a specialist mortgage broker can advise you on eligibility for Help-to-Buy schemes.
But if you’re worried your fixed rate deal is coming to an end, a mortgage broker can work with a comprehensive range of providers from across the market to find the best new mortgage for you, based on your financial circumstances. Unlike high street banks and building societies, we aren’t tied to certain products.
Brokers also have access to specialist lenders who help people in specific circumstances.
Clayton-Welch Associates specialises in offering professional, impartial support to people who’ve had difficulties with mainstream mortgage lenders. We work with a comprehensive range of providers from across the market to help clients find the right mortgage for residential and buy-to-let properties. For commercial mortgages we also act as introducers only.
Your property may be repossessed if you do not keep up repayments on your mortgage.
We rely on referrals for our business, so customer service at the forefront of everything we do. We are passionate about getting you the result you want and we accompany you through every step of the way to a successful mortgage application.
To find out how we can help you move into your dream home, contact Clayton-Welch Associates www.clayton-welch.com
Times article 15 July 2017.
Nationwide Building Society.
Bank of England historical data (from Guardian article, 10 Jan 2013).