Bank of England Interest Rate Rise Effect on Mortgages

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As widely anticipated, the Bank of England has raised its benchmark interest rate from 0.1% to 0.25%.

As it has been a good while since we have been in an environment where we expect interest rates to rise steadily over the next few years, here are a few things to look out for from a mortgage perspective:

Don’t get caught out on a Discounted Variable deal

Any variable rate linked to the Bank of England will only move in line with changes the BoE makes, these are typically called Trackers. What nearly always catches some people out are Discounted Rates, as these are typically linked to the lenders’ own Standard Variable Rate. While the vast majority of lenders move their Variable Rate in line with the Bank of England, they don’t always do that. It can be by less, but it can also be by more. The way people get caught out is that lenders often change their variable rate the month AFTER the BoE makes a change, which means you get loads of Discount rates topping all the best buy tables for a good few weeks after a change in the Base Rate.

Therefore you need to look very carefully then at a few things such as:

    • When did the lender last update their variable rate?
    • What have they done previously?
    • How much more do you think rates will go up in order to see if it works out cheaper?

For these reasons, we feel they are best left alone. A fixed-rate is simpler, and a Tracker rate is clearer. It’s a bit of an old-school practice with Discounted rates which are often used by smaller Building Societies but in a rising rate market, you are likely to see this until rates stabilize again, which could be a good few years by the looks of things.

Look at the margin between Fixed and Variable Interest Rates

This is always the biggest hint of where lenders think rates are going over the next 2 – 5 years. We have in recent weeks seen a lot of lenders introduce Tracker/Discount rates that are around 0.1% – 0.25% cheaper than the fixed rates they are offering. That is always a clear guide that rates are likely to rise, but more crucially, it can tell you by how much.

In a very simple example, if a 2-year Tracker is 0.2% cheaper than a fixed rate, lenders expect rates to go up by at least 0.4%, as it may start cheaper, then with a rise goes to the same level of the fixed-rate, but then another rise makes the Tracker more expensive. That way the lender collects the same level of interest (or more should rates go even higher) than on a Fixed rate. So you may find picking a higher fixed rate at the start, may save you more money than a lower-priced Tracker.

These are probably the main things to look out for in the coming weeks. The real test will be next year as if inflation does not come back toward the 2% target level the Bank of England set, we could see more interest rate rises, or tightening of other fiscal stimuli until that has been achieved. Some analysts expect a steady and slow rise in interest rates well into 2023 so these are themes we will have to get used to from a mortgage perspective.

Please speak to one of our London Mortgage Broker advisers if you have any questions about today’s announcement that the Bank of England has raised its benchmark interest rate.