Experts are predicting four further base rate rises from the Bank of England (BoE) over the next two years.
Whilst nothing is set in stone, it has been confirmed by Mark Carney, BoE Governor, that any future increases will be “gradual”. However, even if the potential base rate rises follow the previous one in 2017, that could still be an overall increase of 1% over the next two years.
So, what does that mean for mortgage holders?
It depends on the type of mortgage:
Variable or tracker rate mortgages
People with variable rate or tracker mortgages are almost guaranteed to see their monthly repayments rise in line with base rate increases. And we all know mortgage lenders generally waste precious little time in increasing the amount they charge you when base rates go up.
This is due to the way these mortgages work:
Tracker rate mortgages: These are made up of a margin dictated by the lender, plus the BoE base rate. That means that when the base rate changes, so will your interest rate and, consequently, your monthly repayments.
Variable rate mortgages: Every lender has a standard variable rate which is set internally. While it is not dependent on the base rate, it is likely that lenders will follow suit when the base rate rises or falls.
Put simply, when the base rate changes, a tracker rate mortgage will automatically follow, while a variable rate mortgage is likely to, but it is not guaranteed.
These mortgages have their advantages and disadvantages, though. For example, between 2007 and 2009, the base rate fell from 5.75% to 0.5%, which would have resulted in a welcome reduction in monthly repayments for variable rate mortgage holders. In addition, since 2009, the base rate remained unchanged until last year’s 0.25% rise, giving variable mortgage holders years of stability.
Fixed-rate mortgages
Those on fixed-rate mortgages are unlikely to be affected by a base rate increase immediately. They will however, see a change when they come to the end of their fixed-rate period.
Fixed-rate mortgages usually have a stable interest rate for a set amount of time, normally between one and 10 years. However, once this time frame ends, the mortgage will automatically default to the provider’s variable or tracker rate, putting fixed-rate mortgage holders in the same position as variable rate holders, eventually.
So, what should you do?
If you are currently on a variable rate mortgage, you may want to consider switching to a fixed-rate before any potential rate rises come into effect.
It’s important to consider not only the rate you are charged, but also the costs of switching mortgage lender or product. The lowest fixed-rates often have the highest arrangement fees and the true cost of the product needs to be calculated over the term of the fixed-rate to see which the most cost-effective deal for you is. Naturally, these are calculations we can run on your behalf.
If you have a fixed-rate mortgage and are within three months of it coming to an end, now is the ideal time to be considering your options. Again, it’s a case of calculating the true cost of other deals, both for your existing and alternative lenders. However, if your fixed-rate mortgage has more than three months remaining, then there’s little you can do right now.
How can taking advice help?
Talking to an independent mortgage adviser, such as ourselves, can help you to see your finances with more distance. Sometimes it can be hard to see simple solutions that are obvious to others, purely because you have been paying your mortgage for so long and have developed a routine.
Unfortunately, standing still is likely to cost you more financially, than shopping around will. The only thing you lose by shopping around is a little bit of time.
To get started and talk to a mortgage adviser, contact us on 0800 612 8099 or request a call back by clicking here.