What to do about the increased interest rates?

As interest rates rise again for the second time in 3 months, there are several things to know for the existing homeowners and prospective buyers.

What are the keynote takeaways?

• The interest rate spiked from 0.25% to 0.5%. The Bank of England increased it for the second time in 3 months.
• Buyers with variable rate mortgages (VRM) will face extra monthly mortgage repayments. Currently, there are about 2 million homeowners with VRMs.
• For a typical £200k mortgage, the increased interest rates mean a £24 uplift in monthly mortgage payments.

Increased interest rates in details

The Bank Rate is the official cost of borrowing money. Recently, The Bank of England has increased the interest rates from 0.25% to 0.5% for the second time in 3 months.

This change results in rising monthly mortgage repayments for homebuyers with variable-rate mortgages. Approximately 2 million homeowners with VRMs will see their monthly payments increase by an average of £24 for a £200k mortgage.

A mortgage is arguably the most popular payment option for properties right now, especially for the new builds in London. When done wisely and with a sensible approach, mortgages might be a favourable solution for stepping onto the property ladder.

The recent changes in the interest rate come during already challenging settings for the buyers and homeowners. Currently, consumers are struggling with rising food and energy prices, while we might see the National Insurance contributions increase in April 2022.

On average, energy costs might reach £1,971 in 2022, a 54% increase. This follows the changes by Ofgem to the charges of energy companies.

Worryingly, The Bank of England revealed the most significant drop in disposable income for families in 30 years.

What are the reasons behind interest rate spikes?

Perhaps the main driver for the rising interest rates is inflation – it hit a 30-year record in December 2021 and reached 5.4%. The Monetary Policy Committee or MPC changes the rates to control inflation.

In simple words, inflation means the price growth levels for the things we buy. According to the Consumer Prices Index, MPC needs to maintain the inflation level at 2%. But the inflation now is more than 100% higher than the target goal and might reach even higher peaks of 7% in the upcoming Spring of 2022.

The MPC consists of 12 members who vote on the changes for the interest rates. During the latest meeting, four of them voted to increase the Bank Rate even further, to 0.75%. This means we might expect new spikes in the interest rates soon.

How might rising rates affect you?

As mortgages often seem like a favourable payment option for new builds and off-plan property, rising interest rates might significantly affect the budgets of prospective and existing homeowners.

However, only people with mortgages that depend on the Bank Rate will face changing monthly repayments for their mortgages. For instance, those buyers with VRMs need to pay more when interest rates rise and vice versa. These are mortgage products such as tracker deals and standard variable rates (SVR) mortgages.

Currently, some 850k homeowners have tracker mortgages, with a further 1.1 million with SVRs. This is according to the numbers from UK Finance.

If buyers have a £200k mortgage, they will see a £24 jump in monthly mortgage payments, in line with the latest spike in interest rate. When we add the previous uplift in the rates, the total monthly increase reaches almost £40.

In turn, 74% of mortgage holders have fixed-rate products. Such mortgages are not following the changes to the interest rates, so there is no increase in monthly repayments. A fixed-rate mortgage typically lasts from 2 to 5 years.

Advice to homebuyers and homeowners

• Holders of fixed-rate mortgages have nothing to worry about until the end of the mortgage term.
• Worried holders of the tracker mortgages might benefit from finding a favourable fixed-rate deal. But before that, make sure there are no fees for the earlier ending of the deal.
• As for the SVR, buyers and homeowners can opt for new mortgages at any time.

Despite rising interest rates, savvy buyers can still find favourable mortgage products in the market. On average, a 2-year fixed-rate mortgage offers a 2.44% interest rate. In turn, a five-year fixed rate product is around 2.71%, and a 10-year fixed-rate mortgage is 2.85%. By comparison, an average SVR has a 4.46% interest rate.

If homeowners or buyers struggle with the monthly mortgage repayments, they should contact their lender promptly. Lenders can support the customers with payment holidays or provide a temporary interest-only mortgage. Once the payment is missed, the options are very limited.