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Base rate and mortgages: all eyes on December

·5-min read
Unsplash ( )
Unsplash ( )

While the Bank of England base rate remains at steady low of 0.1%, the prospect of continued rock-bottom interest rates is fast diminishing.

Inflation – as measured by the Consumer Prices Index – stood at a heady 4.2% in the 12 months to October 2021, more than double its 2% target set by the government. It’s largely due to a combination of soaring energy costs and pressure on supply chains since trade re-opened post-Covid.

Interest rates and mortgages

Rising inflation is mounting pressure on the Bank of England’s Monetary Policy Committee to raise interest rates in its next meeting, which falls on 16 December.

And with many commentators predicting a rise of 0.25 or 0.5%, it could add on significant costs to homeowners paying variable rate mortgages, while new mortgage deals have already factored in a rise.

Winkworth, one of London’s largest chain of estate agents, said: “Even a small rate increase can have a marked effect on mortgage repayments that track the base rate… it makes a big difference to people’s budgets.”

For example, if the rate on a £200,000 repayment tracker mortgage taken over 25 years were to rise from 3.5% to 4%, monthly payments would go up by an immediate £53.

Borrowers on fixed rate loans will be sheltered for the duration of the fixed term. But the deals available whenever they expire will be dearer. Lenders take their cue from movements in the base rate, with many already reflecting a likely rise in their pricing.

Even if the base rate remains unchanged in December, it is expected to increase early in 2022. The Bank itself says it could reach 1% by the end of 2022.

Record low rates

So what’s been the landscape for interest rates to date? The MPC dropped the base rate to a record low of 0.1% in March 2020 at the start of the Covid pandemic.

And the trajectory had already been on a downward curve during the decade prior to Covid-19.

Rates fell dramatically, from 5% to 0.5%, in the aftermath of the 2008 financial crisis. The rate halved again, from 0.5% to 0.25%, in the wake of the Brexit referendum in 2016.

However, after 18 months of the current rock bottom rate, the feeling within financial markets is growing that a rate rise is inevitable, either side of Christmas.

Shop around now

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said homeowners should start locking in better deals now: “If you’re on a variable rate deal, your rate is likely to increase with any BoE change. So, you may want to consider bagging a fixed deal before any changes kick in, and while there are some bargains around. It’s worth lining up a deal sooner rather than later, because when banks are convinced rises are on the way, fixed mortgage rates will go up before any announcement.”

The good news is that mortgage customers with less than six months to run on a fixed deal can start shopping around for a new home loan now. That’s because lenders allow you to lock in a rate up to half a year in advance.

It’s also worth exploring how much a rate rise could affect your future payments. This provides you with some breathing space to plan for how you could stretch your budget to cover a bigger monthly payment, should one be needed when your present deal finishes.

What could a rate rise look like?

We asked Hargreaves Lansdown to produce some figures reflecting how a rise in interest rates would affect typical mortgage repayments. The example tables below show two scenarios, one for a typical variable rate mortgage and the other for a fixed rate arrangement.

We’ve assumed that the present 0.1% interest rate rises to 0.25% in December 2021 and then moves upwards again, to 0.5%, in early 2022.

The figures assume a mortgage with 20 years left to run for the average London house price of £495,000.

Table 1 assumes an average variable rate mortgage of 2.32%, while table 2 shows repayments based on an average fixed rate mortgage of 1.99%.

Both rates reflect the average rates on outstanding property stock. In other words, the rates homeowners currently have, rather than the average rates available on new loans.

From the figures, monthly mortgage payments could be as much as £88 per month higher next spring.

Ms Coles said: “The gradual rate of change might lull homeowners into a false sense of security, because it might not feel like too much of a stretch to find £33 more in the monthly budget. However, the cumulative effect of rate rises can be devastating and, in a few months, if your mortgage payments are £88 higher, life could be much more difficult financially.”

Table 1: example mortgage repayments, assumed variable rate of 2.32%

Mortgage size

£450,000

£400,000

£300,000

£200,000

Current monthly mortgage payment/£

2,345

2,085

1,564

1,042

Monthly payment & increase/£ assuming 0.15 percentage point rise

2,378 (+33)

2,114 (+29)

1,585 (+21)

1,057 (+15)

Monthly payment & increase/£ assuming 0.4 percentage point rise

2,433 (+88)

2,163 (+78)

1,622 (+58)

1,081 (+39)

Table 2: example mortgage repayments, assumed fixed rate of 1.99%

Mortgage size

£450,000

£400,000

£300,00

£200,000

Current monthly mortgage payment/£

2,274

2,022

1,516

1,011

Monthly payment & increase/£ assuming 0.15 percentage point rise

2,306 (+32)

2,050 (+28)

1,538 (+22)

1,025 (+14)

Monthly payment & increase/£ assuming 0.4 percentage point rise

2,361 (+87)

2,098 (+76)

1,552 (+36)

1,035 (+24)

Source: Hargreaves Lansdown

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