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How The Interest Rate Rise Will Affect Mortgages

LATEST NEWS | 12.07.2022

The UK’s interest rates are set by the Bank of England’s Monetary Policy Committee (MPC). The MPC sets the BoE’s base rate – the interest rate at which banks borrow from the BoE. This then affects the interest rate banks charge mortgage borrowers – known as an annual percentage rate or APR.

The Bank of England rate has recently risen from 1% to 1.25% to try and tackle rising inflation. This is the first time since February 2009 that the base rate has been above 1%, as it has been consistently low since the financial crisis in 2008.

How does the interest rate rise affect my mortgage?

How this rise affects borrowers depends on the type of mortgage you have. The rising interest rates mean over 1.1million people with variable rate deals, and 850,000 people with tracker mortgages are likely to see their mortgage rate rise again, for the second time this year. Previous rate hikes have already pushed up mortgage costs - and repayments could rise further. The 0.25% increase is estimated to add £29 a month to a £250,000 mortgage with a 25-year term, or £348 a year. For a larger loan of £400,000, borrowers will pay an extra £46 a month, or £552 a year. If you are on a tracker or a variable mortgage deal, the cost of your borrowing will increase in conjunction with the full increase in the base rate. The small print in your mortgage agreement will tell you how quickly you will see the rise - but this is typically within a month. Your lender should also write to you to let you know of the increase before it happens. If you are on a fixed rate deal, you’re in luck - you won’t be affected by the higher rates until your current deal expires. However, when your current deal does expire, you may find that available rates are much higher than when you were looking for a mortgage deal previously.

Is now the time to remortgage?

If you have less than 6 months left on your deal, now is a good time to start shopping around for a new fixed-rate mortgage. Most lenders will allow you to choose a new rate with them up to 3 months in advance. Switching from a standard variable rate (SVR) to a fixed-rate deal could significantly reduce your mortgage repayments. This is because when on a fixed rate deal, you lock in a rate until the deal ends, meaning you don’t feel the effects of the interest rate rising. You could also speak to your current lender to see if they are able to do a product transfer. If you’re not at the end of your deal and you want to remortgage now is a good time, but you may have to pay exit fees or early repayment charges to be let out of your current deal - these can be costly so make sure you are aware of these before making any decisions. If you’re searching for a new deal, looking to remortgage your home, or need advice on the next steps in the wake of the base rate increase, don’t hesitate to get in touch with the team at TaylorMade.  
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