Base Rate Rise – What to do about your mortgage payments?

The Bank of England Monetary Policy Committee today (2/11/17) decided to raise interest rates by 0.25% to 0.5%. But how will this effect your mortgage payments, and what should you do about it.

This is technically a doubling of rates, but in practical terms this moves the BOE rate back to the level it held from March 2009 to August 2016.

Although we may have got used to the previous 0.25% rate, the reality is that 0.5% has been the norm for the bulk of the past eight years.

10 year Bank of England Base Rate history

  • Aug 2016 0.50%
  • Aug 2016 0.25%
  • Mar 2009 0.5%
  • Feb 2009 1.00%
  • Jan 2009 1.50%
  • Dec 2008 2.00%
  • Nov 2008 3.00%
  • Oct 2008 4.50%
  • Apr 2008 5.00%
  • Feb 2008 5.25%
  • Dec 2007 5.50%

Who decides to increase Base Rates?

Base Rates are set by the Monetary Policy Committee.

The Monetary Policy Committee (MPC) comprises of nine members including five Senior Governors of the Bank of England and four external members appointed by the Chancellor.

The MPC currently meets eight times a year (in 2016 it was decided not to meet in April or October). Meetings are held over three days with a final meeting on Thursday following by an announcement at at 12 noon.

Why do the MPC/Bank of England adjust interest rates?

Adjustment of interest rates is undertaken to shift the national economy in the most appropriate direction.

In the past rates were increased in order to put the lid on inflation (slowing the rise in prices). This was important 20 or 30 years ago when inflation could be into double figures.

In recent years since the Bank Crisis of 2007/2008, inflation has been very low and less of a concern to the Bank. A weak economy and economic performance has led the Bank to maintain a minimal interest rate to encourage borrowing and investment in business to maintain jobs.

Why change interest rates now?

Inflation has started to creep up again and this is a concern for the Bank. Recent ‘suggestions’ of rate rises without taking any action have had some effect but clearly not enough. This rate rise has only really put us back into line with where we were for most of the last 8 years.

Will there be a further interest rate rise?

We cannot say, if inflation continues to rise that may be the case.

How will it effect me as a mortgage borrower?

Although a rise in Bank of England base rate affects issues like savings rates, inflation, and prices, the biggest and most talked about the impact is that on mortgages for householders.

How, or whether a rise in base rates affects you and your mortgage depends on the type of mortgage product you have in place.

BOE Interest rates rises and Fixed Rate Mortgages

If you have a fixed rate mortgage product, this is designed to ‘fix’ your interest rate over a specific period of time and this will protect you against base rate rises.

For example a borrower who took a fixed rate for five years this year will not be impacted by any base rate rises until 2022 at the earliest.

Will an increase in base rates put up fixed rate mortgages?

The pricing of fixed rate mortgages is based on the interest rates at which Banks lend to each other (these are known as swap rates). Therefore, although increases in base rates will put pressure on fixed rates to rise, there is not a direct link.

Fixed rates have been very keen over the last 12 to 18 months and should continue to be comparatively well priced in the near future.

Those considering a fixed rate may be advised to take action sooner rather than later due to pressure for fixed rates to rise as demand increases.

BOE Interest rates rises and Tracker Rate Mortgages

A tracker rate mortgage is designed to track the Bank of England base rate. Therefore a 0.25% rise in Bank of England base rates will see the borrower’s mortgage interest rise.

What is the impact of this?

For borrower with an outstanding mortgage of £100,000, an interest rate rise of 0.25% costs £250 per year or £21 per month.

For a basic rate tax payer £312 of your annual salary will go towards covering this extra cost.

Some lender’s tracker rates do not track the Bank of England rate

There are some mortgage lenders, for example Barclays, where their tracker rate products do not track the Bank of England base rate, rather the lender’s own Base Rate. In the past where this is the case we have always seen the Lender move their Base Rate in line with the Bank’s Base Rate but this is not guaranteed.

Interest rates rises and Lifetime Tracker Rate Mortgages

The majority of tracker rate mortgages track the Bank of England base rate for a fixed period of time. There are some borrowers that will have a Lifetime Tracker mortgage. When you have a Lifetime Tracker mortgage product, your interest rate tracks the Bank of England base rate throughout the time you hold your mortgage.

These mortgages were very popular 10 years ago when the base rate was at 5%. Some lucky borrowers took some rates at that time that have been exceptionally cost-effective since.

A Bank of England Base Rate plus 0.69% tracker costing 5.69% 10 years ago, has been costing 1.19% for most of the past eight years and 0.94% in the past year.

Since this is not a good deal for the lender, Lifetime Tracker rate mortgages are no longer available at BOE + 0.69% or similar levels.

Current lifetime trackers tend to be priced around BOE + 1.74%.

What can you do as a mortgage borrower to protect yourself against further base rate rises?

If you’re not already on a fixed rate mortgage you could remortgage to a suitable rate with a suitable lender.

Most remortgage products offer free legal work and free valuation on remortgage so the costs of switching are generally very small.

The important thing is to take action quickly as pressure will now be on rates to rise. As demand for fixed rates increases that will put pressure on rate pricing.

Switch to Fix

Some lenders offer their borrowers on tracker or variable rates a ‘Switch to Fix’ option. This is a facility to switch to one of the lender’s current fixed rates without penalty.

This is well worth considering if you are concerned about rate rises.

Interest rate rises and standard variable rate mortgages

Whatever the BOE Base Rate, standard variable rate mortgage rates are rarely a good deal for the borrower. Typically priced well above other available rates, those on SVR should seek advice on other options.

What fixed rates are currently available?

Fixed rates are typically priced over 2, 3 and 5 periods.

Competitive 2 year fixed rates are currently priced at 1.29%

Competitive five-year fixed rates are currently priced at 1.79%

What you should do?

If this increase, or potential future increases, in base rates is a concern for you, then you should at the very least explore your options so that you can take action, or be ready to take action a later date if more appropriate.

The best way to explore your options is to seek the advice of an experienced mortgage broker who can consider your situation and the whole of the market to find the most suitable solutions for you.

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