Why are interest rates increasing, and what does this mean for your mortgage?
The cost of living is increasing rapidly, affecting the entire UK economy. There are currently many factors influencing inflation in the UK, including but not limited to Brexit, the war in Ukraine and supply shortages.
But what does this mean for your mortgage and monthly payments?
What are interest rates, and how do they work?
The interest rate dictates the amount you are charged when you borrow money. This is shown as a percentage of the total amount of the mortgage and paid off over the term of the mortgage.
For example, if you borrowed £100,000 at an interest rate of 2% for 25 years, you’ll have to pay £27,179 in interest over the full term of the mortgage, spread out over your monthly payments.
It’s worth noting that the longer the mortgage term, the more you’ll pay in interest overall.
Increasing the term on the above scenario by 5 years will result in the total interest being £33,090 over the full term of the mortgage, which is an increase of £5,911.
What is the Bank of England base rate?
The Bank of England base rate is the interest rate that banks and lenders pay when they borrow from the Bank of England.
The base rate is important as it influences most interest rates, including mortgages.
Usually, mortgage rates go up or down before or quite soon after the base rate changes. This is because the banks will have higher repayments when borrowing from the Bank of England, causing their expenses to increase.
As a result, banks need to charge their customers more in the form of a higher rate on mortgages (raising the monthly payments on each mortgage balance), credit cards and loans etc., to cover their new costs.
Why are interest rates going up?
At the beginning of December 2021, interest rates were at a record low of 0.1%. But with inflation rapidly increasing, the Bank of England has started to push up the base rate in a bid to curb inflation.
The base rate first went up in December 2021 and then again in February 2022, March 2022, and May 2022. As of the most recent Bank of England meeting on 4th May, we saw the base rate increase to 1%. This is ten times higher than 6 months ago.
The current guidance from the Bank of England is that it would like the base rate to be around 1.5% by the middle of 2023. However, it cannot be known for certain exactly when the Bank of England base rate will go up.
What does this mean for my mortgage?
Homeowners with fixed-rate mortgage deals will not be affected immediately by any rate change but will likely find remortgaging potentially more expensive. Getting a new deal, anything like their current deal, could be impossible, or at the very least, take a lot of work searching out the best opportunities.
Those with variable rate mortgages (aka a tracker mortgage) are likely to see a big impact at the highest level, as their monthly mortgage payments rise in line with base rate changes. However, this can be prevented by remortgaging and moving your tracker mortgage to a fixed-rate product, which will lock in your payments for the term of your fixed rate—usually 2 or 5 years—although other alternative term options are available.
How can CLS Money help you?
If your current fixed-term deal ends next year, you're unsure whether remortgaging could help your financial situation, or even if you need to more about the specifics of your current mortgage product and would like more information, contact CLS Money for free advice.
Our expert advisors will explain how any Bank of England interest rate rise could potentially affect your fixed-term or tracker mortgage and any potential change to your monthly payment. With recent and regular changing interest rates, it's likely to bump up expenses considerably for many households. And with what seems like a rate rise every month in the current climate, searching out a better deal might just have made your top priority.