The governor of the Bank of England, Mark Carney, has suggested that interest rates could rise before the end of this year. We know there are more savers than borrowers, so it follows that more people are likely to be pleased at the prospect of rising rates, than those who will be disappointed.
So just how would a rise of 0.25% affect borrowers, and savers?
Fixed rate mortgages
According to the Bank of England, 44% of homeowners are on fixed rate deals, so will not be affected by any immediate rise in rates. Currently 90% of new home-owners are on fixed deals, and they tend to have the largest loans. However, depending on when their two or five year term finishes, borrowers will inevitably face higher repayments eventually.
Variable or tracker mortgages
Most homeowners – 56% – are on a Single Variable Rate (SVR) or a tracker mortgage, so will, in theory, be affected by a rate rise. However, as the Bank of England cut rates, most lenders did not cut their SVRs at a similar pace, leaving many people still paying around 5% a year and such lenders are unlikely to increase their SVRs until there has been a significant rise in base rates, certainly more than 0.25%.
“Lenders with the lowest SVRs – below 5% – are more likely to increase their rates, while those charging more than 5% in many cases won’t.”
Ray Boulger of brokers John Charcol.
Those with tracker mortgages, which follow base rate, will see inevitable increases, and the table below shows what might happen to a notional mortgage, based on the average mortgage rate of 3.11%, rising to 3.36%.
How a 0.25% rise in base rates might affect my mortgage
Loan size | Existing monthly repayment | Repayment after 0.25% rise |
£50,000 | £491 | £497 (+£6) |
£100,000 | £982 | £995 (+£13) |
£150,000 | £1474 | £1,492 (+£19) |
£200,000 | £1965 | £1,990 (+£25) |
£250,000 | £2456 | £2,487 (+£31) |
Source :CML Base: 10 year remaining term. Repayment mortgage
Interest only mortgages
There are 2.6 million people on “interest only” mortgages, according to the Financial Conduct Authority (FCA). Unlike repayment mortgages, which pay off the capital by the end of the term, these mortgages leave borrowers still owing the original sum.
While such people are likely to have lower repayments to begin with, they will soon face proportionately larger increases, if on a tracker rate. Using the same rates as in the table above, someone on a £50,000 mortgage might pay an extra £11 a month, if rates went up by 0.25%.
Someone on a £150,000 interest only mortgage might pay £31 more.
Long-term impact
As Mark Carney is fond of reminding us, the rises in base rates will be small, and the pace will be gradual with them reaching about 2% over the next three years.
So while the impact of the first hike may be small, someone with a mortgage advance of £150,000 could eventually find themselves paying £161 a month more, according to figures supplied by the Halifax, Britain’s largest lender.
How subsequent rises could effect mortgage payments
Average monthly repayment | % rise in mortgage rate | Increase in monthly payments |
£679.74 (current average for new mortgages) | ||
£698.9 | 0.0025 | £19.15 |
£718.36 | 0.005 | £38.61 |
£738.13 | 0.0075 | £58.38 |
£758.2 | 0.01 | £78.48 |
£778.56 | 0.0125 | £98.82 |
£799.23 | 0.015 | £119.48 |
£820.18 | 0.0175 | £140.44 |
£841.43 | 0.02 | £161.69 |
source: Halifax Base: Repayment mortgage for £150,000 loan
Financial Industry Opinion
Most industry experts think it unlikely that existing fixed rates will be withdrawn quickly. But they are unlikely to go any lower. So anyone on a variable or tracker rate may wish to switch to a fixed rate deal.
‘If you are on a variable rate, and would struggle to pay your mortgage if rates rose, it is worth locking into a fixed rate.”
“There are some really cheap deals on the market, with two-year fixes starting at 1.05% and five-year fixes from 2.14%.”
Mark Harris, chief executive of broker SPF Private Clients.
Good News For Savers
After years of being in the doldrums, savings rates have finally begun to improve. Rates have increased by 10% since June, according to advice site Savingschampion.
The prospect of a rate rise before the end of the year is likely to put even more pressure on savings providers to increase rates.
“It’s been a long time coming and I’m sure I can speak for all savers in saying ‘bring it on’.”
Anna Bowes, director of Savingschampion.
How a 0.25% rise in base rates might affect my savings
Category | Current best buy rate | Best buy after 0.25% rise |
Easy Access | 0.016 | 0.0185 |
Notice Account | 0.0205 | 0.023 |
Easy access ISA | 0.016 | 0.0185 |
Notice ISA | 0.016 | 0.0185 |
1 year fixed rate bond | 0.0207 | 0.0232 |
3 year fixed rate bond | 0.0265 | 0.029 |
5 year fixed rate bond | 0.0306 | 0.0331 |
source:Savingschampion
If any of you would like more detailed information on any aspect of UK Interest Rate Rise , send me an e-mail and I’ll be pleased to advise further.