The Bank of England’s Monetary Policy Committee has voted to raise interest rates by 0.25% to 0.5%, the first time in ten years rates have gone up, in a move that could have a significant effect on borrowers.
The decision to raise interest rates will see the average homebuyer with the typical mortgage in Britain of £175,000 pay about £22 every month. The 500,000 borrowers on one of the most popular deals, Nationwide’s base mortgage rate tracker, will see their interest rise from 2.25% to 2.5%, taking the monthly bill from £763 to £785 on a £175,000 loan.
For many home owners, the rate rise won’t have a dramatic effect on the affordability of their mortgage, but for those borrowers who are already struggling to keep up with their repayments this increase could be enough to make their monthly repayments unaffordable.
At his press conference announcing the decision, Mark Carney, Governor of the Bank of England said that the Bank was aiming to continue slowly raising interest rates over the next several years, which could increase pressure on borrowers.
How will rate rises affect you?
For existing mortgage customers, a rise in interest rates will lead to higher monthly repayments. For the 57% of borrowers currently on fixed rate deals, the effect won’t be felt immediately, but depending on when their two or five year term finishes, these borrowers will eventually face higher repayments. Homeowners are being warned that they could be facing a ‘payment shock’ if they fail to remortgage and end up paying their lender’s standard variable rate. Borrowers with Santander, for example, could see their SVR go from 4.49% to 4.74%.
For borrowers with variable or tracker mortgages, or those with interest only loans, the effect will be felt more immediately. Lenders with the lowest standard variable rates, those below 5%, will probably be the first to increase their rates.
Meanwhile, homeowners with interest only mortgages will also see their monthly repayments increase, but these higher monthly repayments might, in some cases, reduce the amount of money they are able to put into a repayment vehicle to repay the principal loan when the interest only term ends.
Jeremy Leaf, former chairman of the Royal Institute of Chartered Surveyors, said; "Although the change is very small, it could have a disproportionate impact on many, especially first time buyers and sellers, who have told us they have high loan-to-value mortgages and/or other loans. The direction of travel for interest rates will have a bearing on future plans. Inflation rising faster than salaries is also adding to the pressure on household finances.
“It’s not the increase itself but the impact on buyer confidence and a property market already compromised by political and economic uncertainty, which is more relevant.”
`We can help.
At Negative Equity UK, we’re property debt specialists. If you are worried about the impact the rise in interest rates will have on your finances, take a look at our reviews and contact us on 0161 631 2727 or online at negativeequityuk.com to arrange an initial free, no obligation consultation.