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What Does the Interest Rate Rise Mean For Your Mortgage?

Sunday, August 05, 2018

The Bank of England has frozen interest rates at 0.5 per cent, giving homeowners and buyers a few more months to consider switching to a fixed-rate mortgage, if they haven't done so already. UK interest rates rose in November last year for the first time in a decade, from a historic low of 0.25 per cent to 0.5 per cent. So what does this mean in real terms, are more rises expected and if you are considering buying your first home should you speed up your search? 

It was widely expected that the interest rate would rise to 0.75 per cent this month. However, disruption caused by the "Beast from the East" that hit this March led to the economy growing by just 0.1 per cent in the first three months of the year. Experts predict that this slowdown will be temporary, so an interest rate rise is expected towards the end of this year, followed by two more increases in 2019 and 2020.

“Although there is a great deal of speculation about future rises it is important not to get carried away. Any rise should be gradual and it will likely remain a good time for borrowers to assess their current mortgage situation,” says Kevin Roberts, director, Legal & General Mortgage Club. “What remains clear though is that there is more choice and competition in the market than ever before, and borrowers should make the most of this opportunity."

Some banks, including Nationwide, Halifax and Tesco already increased rates on some of their products over the past few months, but most experts are keen to point out that the market remains very competitive, which is stopping rates from spiralling. While a rise in interest rates may come to a shock to anyone who bought their first home in the past decade, higher mortgage interest will have been factored into lenders’ calculations since new rules were introduced in 2014 to curtail high-risk lending, so don’t panic.

“Lenders are now very stringent about what they deem to be affordable and treat lending as though mortgage rates were three per cent above their standard variable rates,” says Colin Payne of Chapelgate Private Finance. “We've had an exceptional period of low interest rates and many now think this is the norm. Borrowers need to understand that prior to the financial crisis in 2008 the Bank of England Bank rate was five per cent and average mortgage rates well over six per cent.”

Mortgage rates are unlikely to return to the “old norm” of five per cent even if they do rise several times this year, however, says Mark Harris of SPF Private Clients. “The expectation is that they will settle around two per cent,” he says. “The economy is still in tentative recovery mode and Brexit is another uncertainty on the horizon so I would be very surprised if we saw many interest rate rises.”

A fixed-term mortgage deal will shield homeowners against rate rises for a certain period of time (usually two, five or 10 years), explains Charles McDowell commercial director of mortgages at Aldermore. Borrowers may want to avoid getting a fixed-term mortgage if they are hoping to capitalise on declining rates, but most mortgage advisers expect rates to rise rather than fall.

If you’re reaching the end of your current mortgage agreement, it should be a top priority to think about remortgaging rather than revert to a lender’s expensive standard variable rate. Colin Payne of Chaplegate Private Finance says borrowers should start reviewing their options six months before their rate expires, while some online mortgage brokers will do the work for you and let you know when you could save money by switching.

“Although shorter term two-year fixed rates remain the lowest on offer, we are seeing more people consider the merit of fixing for longer,” says David Hollingworth of L&C mortgages. “Fixed rates are on offer for up to 10 years, but it’s still important to bear in mind that most deals will lock the borrower in with early repayment charges. That could limit flexibility in the future and so, although worthy of consideration, many borrowers will still turn to the more predictable five-year horizon.”

“As house prices and interest rates continue to rise, now is a good time to buy. However, buying a property is a huge financial and emotional commitment, and something which shouldn’t be rushed,” says Mark Hayward, chief executive of NAEA Propertymark. Pendleton reinforces this message by pointing out that first-time buyers should not be panicking about being priced out of a mortgage because rate rises will be introduced gradually in minor increments. However, “if buyers are ready and just waiting for the better weather it wouldn't be a bad decision to bring forward their search,” says Payne.

Article taken in part from www.homesandproperty.co.uk

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