The relentless tirade of worrying and confusing news about the economy feels like a lot right now. After the government announced a £45bn tax-cut package that would rely on heavy government borrowing, the global markets reacted, and the British pound fell to record lows against the US dollar.
In response, the Bank of England warned it would have to raise interest rates to curb the resultant inflation, meaning the cost of borrowing money could double by Spring next year. But what does that mean for your mortgage? We spoke to money expert, Laura Whateley, author of Money: A User’s Guide to break it all down.
‘How affected you will be by rising interest rates, and turmoil in the mortgage market - which means banks are withdrawing loans or reducing how much they are lending- depends on whether you have a mortgage already, and if you do, what kind of deal you are on,’ Laura says. ‘How much you get charged in interest on a mortgage is influenced by the Bank of England base rate, which is rising to the highest levels we've seen since 2008.’
Here's what you need to know about mortgage rate rises
If you have a tracker mortgage, it will be pegged to and rise with the base rate. Fixed rate loans are usually slightly higher than the base rate at the time you take one out but lock you into that rate for several years.
If you are on a fixed-rate mortgage that you took out before the latest rate rises, and that doesn’t end for years, you can relax - for now. We don't know what rates will look like in five years’ time.
If, however, your deal will be due to be renewed soon, if you are on your lender’s standard variable rate, or, if you are looking to buy a property, then you can expect much higher monthly housing bills. For every 1 percentage point that a mortgage rate increases, expect to pay an extra £50 a month per £100,000 of mortgage you have, according to Money Saving Expert (MSE).
This time last year the base rate was just 0.1 per cent, and fixed rate mortgages often less than 1 per cent. Now it is 2.25 per cent, due to rise further in November, with the best fixed rates around 4 per cent already. Speculation is it will hit 6 per cent next spring.
A mortgage of £300,000, with an interest rate that rises from 1 per cent to 6 per cent, would cost you about an additional £750 a month (according to the MSE calculation).
So, what can you do about mortgage rate rises?
If you are on a variable rate mortgage or your fixed rate ends within the next 6 months, see if you can lock into a new affordable deal before rates rise any further next year. Your existing lender may offer you a “product transfer” which could be cheaper than going to a new bank.
If you are really worried about how you will be able to afford a mortgage with the new rates, or if your loan comes to an end in 2023 when rates may be higher, always speak to your bank. You may be able to go interest-only, extend your term, or take a mortgage holiday, to reduce your monthly bill or give yourself some breathing space.
Laura also recommends speaking to a broker, who can really help you understand the changing mortgage market, and your options.