Whether you’re a first-time buyer or looking to move house, one thing every mortgage has in common is interest rates.
The Bank of England (BoE) is responsible for setting the ‘base rate’ for the UK, which is currently 0.1%. However, this is expected to rise.
This low base rate is an added incentive for those looking to borrow. If you’re a first-time buyer, you could secure a cheaper mortgage before the interest rates begin to creep up.
But what if you’re already on the property ladder? How will the rise affect those on fixed-rate, variable-rate or interest-only mortgages, and what action should you be taking right now to reduce payments and secure a better mortgage deal going forward?
How does the interest rate affect my mortgage?
The base rate is the interest at which banks borrow money from the BoE. When the BoE raises the base rate, that’s when you’ll hear interest rates have gone up. Savers will rejoice as it means a better rate on their accounts. But borrowers want as low an interest rate as possible, in order to make lower repayments on their mortgages.
An interest rate rise affects mortgages differently. It depends on your own circumstances more than anything.
If you have a fixed rate mortgage
Fixed-rate mortgages mean that you have a fixed interest rate for a set period, usually two or five years (however there are some 30-year fixed-rate mortgages on the market). Customers with fixed-rate mortgages won’t be impacted by the predicted increase in interest rates – unless their fixed-rate mortgage deal is coming to an end.
If you have a fixed-rate mortgage, you may want to switch mortgages sooner rather than later to take advantage of the low-interest rates before they begin to climb. Switching mortgages when you’re not moving home isn’t as complex as you might think and could save you thousands over the course of your loan.
Early repayment charges are a concern, but if you’ve only got a few months left on your fixed rate, the timing could be perfect. Check your current mortgage’s terms and conditions.
You have a standard variable rate, or a tracker mortgage
Most homeowners have a standard variable rate mortgage or tracker mortgage. These mortgage types are likely to be affected by the impending interest rate rise. Rates adjust along with the BoE base rate, so you can’t be certain of future rises – and falls.
If the Bank of England’s base interest rate gradually rises, those with variable-rate mortgages could be in for a shock. A homeowner with a £150,000 mortgage on a 30-year term, would see their payments rise to around £632 a month if the interest rate climbed to 3%.
One answer may be to bite the bullet, pay the earlier repayment fees and re-mortgage now on a fixed rate before the slow rise gets underway.
If you have an interest-only mortgage
An interest-only mortgage means you only pay the interest on the loan and not the capital. That means payments are far lower than those on repayment mortgages.
It also means that an interest rate rise would hit harder as a proportion of an interest-only mortgage holder’s monthly payment. Bit by bit, shouldering one rise after another over months or years, interest-only mortgage payers may find themselves seriously out of pocket.
Tips to help you manage a mortgage interest rate rise
- Establish what mortgage type you have
If, for example, you have a five-year fixed-rate mortgage with three years remaining, a rise won’t impact you right now. Establishing what type of mortgage you have allows you to work out how a rise in rates will affect you.
- Work out how much you can afford
If you already struggle to make your mortgage payments and are concerned about whether or not you’ll be able to pay them if there is a rise in the interest rate, you can prepare in advance before that day comes.
- Build your credit score
By working on your credit score you can help set a great foundation to get a better deal if you remortgage, or if you’re on a fixed-rate mortgage whose term is ending.
- Overpay where possible
If you’re not expecting an interest rise anytime soon, you can take advantage of the low rate you have at the moment by paying a little extra towards your mortgage – if your lender allows it. There are limits on how much you can overpay in a year and in some cases there may be charges. Be sure to check with your mortgage provider before you start overpaying.
As a leading provider of financial information, Norton Finance can give you the support and guidance you need, no matter what type of mortgage you’re paying.
This article was updated in June 2021.