There has been a lot of uncertainty over the past few months, with inflation continuing to rise and interest rates quickly following suit. Homeowners have been concerned about how the recent interest rate rise will impact their mortgage, at a time when energy bills are rocketing, food prices increasing, and other expenses are stretching their budgets to the limit. To give you a better idea of what the interest rate rises could mean for you, we explain everything you ned to know.
What does the recent interest rate rise mean for my mortgage?
The Bank of England (BoE) raised the base interest rate from 0.1% to 0.25% towards the end of 2021, before pushing the rate higher still in February 2022 to 0.5%. More recently, interest rates rose by a further 0.75% to 3% - making it the eighth rise in less than 12 months and the biggest since 1989. These are incremental increases that may not seem that significant, although they could have a big knock-on effect for your mortgage.
Why has the interest rate increased?
The main reason interest rates have increased is due to growing inflation. The BoE say that raising interest rates is the best way to get inflation down as it costs more to borrow money. This encourages people to cut back on borrowing, spend less and start saving.
Other causes for the rise in interest rates is that consumers began to spend more as Covid restrictions were eased, although many companies did not have enough goods to sell. So, with more people chasing too few goods, this led to an increase in prices.
How much will my mortgage increase by?
The amount your mortgage will increase by will depend on the type of mortgage you have.
There are around 2.2 million with a variable rate mortgage in the UK and these interest rate rises will lead to high monthly repayments, which could mean paying hundreds of pounds more every and even thousands for some with bigger loans.
If you are on a tracer or discounted-rate deal, you will very quickly see a rise in repayments as this type of mortgage directly follows the base rate.
Standard variable rate (SVR) mortgage rates are decided by each lender. The likelihood is that most will increase, although it may not be by as much as 0.75%.
For homeowners who have a fixed-rate mortgage, you will not have to pay any more until the deal expires, so you should keep a close eye on what your lender intends to do.
The rise in interest rates will also have an impact on new mortgages. For a short period of time, hundreds of deals were taken off the market due to the uncertainty caused by ex-chancellor Kwasi Kwarteng’s mini budget. However, things are returning to normal with lenders offering flexible deals for people looking for a new mortgage, although they are now reflecting the increase in interest rates.
Is there anything I can do to reduce the impact?
There are some things you can do to reduce the impact of the recent interest rate rise:
- Review your mortgage deal
Check your paperwork or with your mortgage provider to find out what type of mortgage you have so you know how it will affect you.
- Look at your finances
See if you can afford the increased repayment amount. Look at your monthly budget to check if there are any cutbacks you can make and try to build up savings for any more potential rises in the future.
- Manage your money
If you are worried about failing into debt, use a debt advisor to help you budget and assess your income/outgoings before you experience financial difficulties.
- Raise your credit score
Improving your credit score can help you get a better deal when it comes to finding a new mortgage – although it may be difficult to do so during this period.
- Check you have the best deal
Whether you’re coming to the end or still have some time left on your mortgage, look around to see if there are any better deals available. There may be some fees involved, but it could end up saving you more money in the long run.
- Overpay your mortgage
Pay more on your mortgage before the interest rate rise hits your pocket. However, before doing so, check the overpayment limits included in your deal and if there are any charges involved too.