Rising interest rates will impact all UK mortgages: here’s what you can do

As expected, the Bank of England has voted to increase interest rates. With the so-called Cost of Living Crisis deepening, this will affect your mortgage as well as share prices, cost of borrowing and saving opportunities. Our advisors have outlined the potential consequences of this change as well as some guidance on what to do next.

What’s happened?

Following widespread speculation, the Bank of England has today voted to increase interest rates from 0.25% to 0.5%. This is the latest in a string of interest rate changes in the UK as the Government seeks to temper the economic impact of coronavirus. In March 2020, at the very start of the pandemic, an all-time low of 0.1% was set, before the first increase in more than three years in December 2021 to 0.25% as restrictions began to ease. Today’s announcement is the first back-to-back interest rise since 2004. In our view, this change will only continue throughout the coming year with rates as high as 1.25% possible by the close of 2022.

How will this impact my personal finances?

The impact of rising interest rates on the personal finances of borrowers, savers and shareholders is likely to be significant. Mortgages, however, are expected to be one of the areas most affected by this change. To put this into context, five-year fixed-rate mortgages were available at an initial rate of 0.99% last year, compared to 1.25% currently. This would increase monthly mortgage payments by £65 for a £300,000 mortgage.

So – why have the Monetary Policy Committee (MPC) voted in favour of this change? And what can you do to protect yourself against rising mortgage rates?

Why have the MPC voted to increase interest rates?

The Monetary Policy Committee (MPC) is primarily concerned with economic growth, UK employment rate and inflation. Rates of inflation have risen to 5.4% this January (a 30-year high) and, in light of the government’s 2% target, this is clearly cause for concern. Average wage growth for the public sector was 2.6% last year whilst the private sector saw 4.5% growth. As long as wage growth lags behind inflation, the cost of living in the UK increases with essential goods and services becoming an even greater strain. Throw rocketing wholesale gas prices and worldwide supply shortages into the cauldron and you have what’s being a termed a “cost of living crisis”.

In such circumstances, interest rates are used by Bank of England to curb inflation – by increasing borrowing costs and, therefore, suppressing demand and depressing prices. With surging energy prices compounding the current situation, we anticipate this spike of inflation to be both higher and longer-lasting than normal. So, what does this mean for your personal finances and what should you do?

How will this affect my mortgage?

Whilst all mortgage types will eventually be affected by rising interest rates, some homeowners will see more instant change than others. Fixed-rate mortgages, for example, protect against increases in interest and thus, for the time being, will remain unchanged. However, as soon as the agreed fixed-rate period comes to an end, these mortgage rates will promptly be hoicked up to the level of all other interest-dependent mortgage packages. Repayments on standard variable rate (SVR) mortgages will likely see a rise as, although changes are made at the mercy of your lender, more often than not lenders change in line with the fluctuations of interest rates. Homeowners with tracker-type variable mortgage deals, though, will notice an instant change to their monthly payments as, unlike other types, these mortgage rates are directly tied to interest.

What should you do?

If you have a mortgage, we advise that you review both the type of mortgage (variable, tracker or fixed-rate) and the length of term. Options open to you include locking into a new fixed-rate mortgage as soon as possible, however fees may apply and everyone’s circumstances are different so it’s best to seek advice before doing anything rash.

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