The rising interest rate has an impact on borrowing money, including mortgages, so you might be wondering what impact this will have on your payments.
Here, we take a look at what this means for those on a variable, tracker, and fixed-rate mortgage and how you could be affected.
Why is the interest rate rising?
Eight times a year, the Bank of England’s Monetary Policy Committee (MPC) meet up to discuss the interest base rate and whether this should change or remain the same. This is then taken to a vote and whichever option has the majority will win. If a change is voted for, they will then decide on what the new interest rate should be. Some of the factors included in making this decision are:
- Rate of inflation
- Economic growth
- UK employment rate
In the last vote, it was decided that the interest rate should be increased to 1%. For context, in March 2020 the interest rate dropped from 0.75% to 0.1%, and the rate had been stable at around 0.5% for a number of years prior to that. The reason behind this decision is that inflation – the cost of goods and services – is rapidly rising, and increasing the interest rate could help to slow this down. This is because businesses and individuals are less likely to take out loans while the cost of borrowing is high which results in less demand and, eventually, lower prices.
Why is inflation rising?
The main reason for rapidly rising inflation rates is that there are supply shortages which increase demand and causes prices to rise. For example, there’s currently a shortage of microchips which has an impact on car production and means that there aren’t enough cars to meet demand – this has pushed up both the prices of new and used cars as finding one is more difficult than usual.
Why does this affect mortgage rates?
A rise in the interest rate affects mortgages because lenders will increase their interest rates based on what the Monetary Policy Committee decide. The price of borrowing will rise for banks and they will look to pass on some of these costs to their customers, which is why you could see your mortgage payments increasing.
What does this mean for my mortgage?
The impact of the rising interest rate will differ depending on the type of mortgage you have.
Variable and tracker mortgages
If you have a variable or tracker mortgage, you will see an immediate increase in your monthly payments. This is because your rate is pegged to the interest rate which means that you’ll be instantly impacted.
Savings can be made if you opt for a fixed rate product, although the price of these is rising too. By choosing a fixed rate product, you can lock in a cheaper interest rate than you’ll currently be paying on your variable mortgage and have the confidence that this will be what you pay for the term of your product, regardless of whether there are further interest rate increases.
Fixed-rate mortgages
If you’re currently on a fixed-rate mortgage, you won’t see any immediate changes to your mortgage payments. This is because you’re locked into the rate that you fixed for the duration of your chosen deal.
However, when your current product comes to an end you will be moved onto the standard variable rate unless you commit to another fixed rate product. This could be with either your existing mortgage provider or a new one, so you can shop around to find the best deal for you.
Often, you can secure a new deal six months before your current product runs out, so if you know that your fixed rate is coming to an end soon it’s a good idea to get in touch with Choice to start researching your options now. This doesn’t only include finding the lowest rate but also deciding how long you’d like to fix it for. 10-year fixed-rate mortgages have been increasing in popularity with people wanting to secure their rate for longer, and it’s also worth noting that the difference between taking out a two or five-year fixed mortgage is smaller than it used to be.
Remember, that if you fix your mortgage and then want to leave this before the term ends you will typically be required to pay an early repayment charge, so consider how long you think you’ll want to stay in your property before choosing a new deal.
At Choice Mortgage Solutions, we are on hand to help you to find the best mortgage for you, so you don’t have to navigate these options alone. Simply contact our team and we’ll be happy to help you.