Despite every expectation that the 4th November would see The Bank of England increase its official bank rate, it surprised us all and kept it at the all-time low rate of 0.1%.
That said, the Bank did make it very clear that a rise is on the cards in the not-too-distant future, and lenders clearly agree that an increase is required, with mortgage rates recently rising. Here’s what a potential interest rate rise will mean for homeowners, savers and landlords.
Why did the Bank hold off on increasing interest rates?
The country is still well and truly in recovery mode, and while the economy is bouncing back surprisingly well, we still have a long way to go.
Higher rates can cause financial distress to borrowers, the largest of which being the UK government. Currently, national debt sits at approximately £2trn, and every one percent rise in rates increases the amount that the government pays in interest by £20bn annually.
Additionally, an increase in rates also stifles the growth and stability of property prices, as well as other financial assets like shares. While a dampening in these areas can relieve inflation pressures, it can impede overall economic recovery if it comes too soon.
While borrowers inevitably love to see rates remaining low, for savers, the opposite is true. The higher the rates, the more healthy pension funds should be, and the greater the rewards from bank deposits and savings.
Despite all of these pros and cons, the bottom line is that inflation is on the rise, and the Bank can’t be seen to be letting it get too high before tightening the reins back on its monetary policy - hence the warning of an imminent rate rise.
Interest rate rise: The impact on savers
Anyone who has been saving cash over the last 12 years in the UK has really borne the brunt of the Bank’s decision to keep the base rate below 1 percent. For savers, it has seemed that cash rates have been falling to new historic lows month after month, so any increase in rates will be welcomed.
Unfortunately, however, banks are notoriously slow to pass on any increases in rates, and rarely ever end up passing them on in full. Even as the base rate begins to rise, it’s unlikely that savers will see their saving rates shooting up with any significance. That said, they should gradually increase, which is a start. These increases should then also see more competition return to the sector, with providers eager to reach the top of the best-buy tables.
If you are considering putting your savings into a fixed rate account, you must carefully consider what the rates may do in the coming months. Any changes to the base rate will be reflected in the fixed-term market, so you may want to see if you can hold out for some higher savings rates before locking your money up.
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Interest rate rise: The impact on borrowers
There have been early warning signs that the end of historically low mortgage rates is in sight, with lenders raising their rates for new home loans before the Bank announced their decision on 4th November.
While the pandemic took its toll in many ways, it ushered in an era of extraordinary relief mortgage-wise, with such consistently low-interest rates and great deals and government incentives for first-time buyers.
Brokers are typically expecting that any increase in mortgage rates will be slow and measured, meaning that mortgage rates will still remain low by historical standards for the foreseeable future.
However, mortgage providers don’t tend to wait when it comes to passing on any rate increases, and even small, incremental changes can make a sizeable difference overall. For example, a 0.5 percent increase in mortgage interest equates to around £50 extra per month based on a £200,000 mortgage over 25 years. For a £450,000 mortgage over the same term, the additional interest expense would be £125 monthly.
First-time buyers will feel the pinch the most, as many have borrowed to the extent of their affordability in order to get onto the property ladder. Many also took advantage of low-deposit loans, meaning that they owe more on their property in relation to its value.
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Lock in a mega low mortgage while you still can
Essentially, the delay in the rate increase, coupled with a clear indication that rate rises are coming, makes the overarching message very clear: lock in mega low mortgages while you still can.
The Bank of England is giving UK homebuyers a few more months to take advantage of record-low mortgage rates and lock in a great rate before they shift their focus onto slowing inflation. This move keeps the housing market booming as we continue to come out the other side of the pandemic.
With the added savings of the stamp duty holiday behind us, rate rises will inevitably contribute towards a dampening of property price growth and market activity. Consequently, now may be a great time to sell, too.
Consider locking in any tracker loans
A tracker mortgage is a home loan that bases its interest rate on an external rate - such as the Bank of England’s base rate - and tracks it, plus a set percentage on top. In light of the likelihood that the Bank’s rates will steadily rise for some time to come, it may be prudent to lock in a fixed rate while the going is still good.
If this is you, don’t wait for the next rate rise to do so, as most lenders will begin increasing their rates ahead of the official Bank announcement, and you could miss your window.
Anyone who is currently on a fixed-rate mortgage will, of course, be protected from any rate rises until their fixed term ends. The concern for anyone nearing the end of their fixed-term is that rates will be considerably higher when it comes time to remortgage. Hopefully, the increases will be gradual enough not to pose too much of a financial burden.
It could also be said that property price increases could go a long way in buffering any losses, as loan-to-value ratios may very well have improved when it comes time to remortgage.
Some people have been in the fortunate position to be able to save money during the lockdowns. While there may have been little incentive to pay the mortgage down further while rates were so low, those funds could now come in handy to cover any additional interest expenses as rates increase.
Landlords also urged to lock in more favourable terms
Landlords with mortgages are also being urged to move quickly in response to the announcement of imminent rate rises. If you are a landlord, aim to complete new property purchases as soon as possible and lock in a low rate while you still can. Many landlords are on fixed-rate loans, but any landlords with buy-to-let mortgages that are on a variable or standard variable rate should act quickly, as they will be the most affected by any rate hikes to come. If you act quickly and convert to a fixed, low-rate mortgage before interest rates rise, you will also be in a better position to avoid hiking your rent up, and consequently improve your chances of retaining tenants.
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If you need advice, get in touch!
The Bank of England is making its position very clear - act quickly while you can and secure some favourable terms on your mortgage before the rates begin to rise. This gives homeowners a chance to fix their mortgages, and landlords an opportunity to remain competitive by doing the same. The Bank’s intention to address the rising inflation is also an indication that the property prices and market may slow in the coming months, so now could be the very best time to sell, too.
If you are thinking of buying or selling, contact us here at Portico on 020 7099 4000. You can also get a free, quick online property valuation through our instant tool.