We knew it was coming and yesterday it finally happened. The Bank of England has raised the base interest rate from 0.5% to 0.75%, in a move widely expected ever since the first rise in ten years that came in November 2017.
At that time, the interest rate rise was seen as a way to control inflation, prevent the cost of living getting higher and to encourage people to spend less and save more. It was expected that a second rise would soon follow, and Thursday’s announcement by the Bank of England’s Monetary Policy Committee finally confirmed that.
The rise to a 0.75% base rate affects millions of households across the UK, but in varying ways. It will bring a minimal rise in returns to savers who have been used to rock bottom returns on their savings for years. So the 0.25% rise will not make a huge difference to them, but it is homeowners who are going to be affected the most.
The effect of the interest rate rise on fixed rate mortgages
For those homeowners with long term fixed rate mortgages there will be no change. Fixed rate deals will continue unchanged for the length of your agreement, however, if your fixed rate deal is coming to an end in the next three to six months, now is a good time to review your options, take good advice and find the best deal for you.
At the end of your current deal, it is likely that your interest rate will go up in parallel to the base rate rise announced today, but being prepared and looking to see what deals are available will help you manage these changes. The national average mortgage amount is £87,000, and today’s 0.25% rise will translate to a £508 monthly payment towards that rising to £519 if the rate is passed on for your next fixed rate deal.
The biggest change will hit the 40% of homeowners who are currently on variable rate or tracker mortgages. Today’s announcement means that millions face a rise in costs to service their debt because the base rate has increased. Tracker mortgages will of course automatically go up and variable rate mortgage customers are likely to see this base rate increase passed on to their deal in the coming weeks.
How much will I have to pay on my variable rate mortgage?
A variable rate mortgage customer could be faced with finding an extra £200-£400 over a year on a typical standard deal, if they have borrowed above the national average amount. And while that might seem manageable, this needs to be viewed against a period where wage growth is lagging behind the rising costs of goods and services, so this small rise in essential costs is likely to affect household spending, which in turn is influential to the economy.
While the base rate rise was not unexpected, it still has an impact that people need to manage, so if you need any advice or to assess your options, contact our residential property department today and we can explain the possible implications to you, and help you identify who to speak to in order to help you directly manage these changes.