The Bank of England has hinted the first rate rise in almost a decade is now likely, and soon. So how much will it cost?
A member of the Bank of England’s rate-setting committee has fuelled speculation that interest rates could rise as soon as November. Gertjan Vlieghe put forward the arguments for a rise in rates “as early as in the coming months” in a speech to economists in London.
What would a rate rise mean for homeowners?
It would mean higher monthly bills for millions of people with variable rate and base rate tracker mortgages.
If and when it happens, it would be the first rise in borrowing costs for a decade –many of these people have never seen their monthly repayments increase.
Those on fixed-rate mortgage deals would be protected from any increase, but only until the end of their deal’s fixed term.
How much higher?
The cost of an interest hike will vary per household, depending on the terms of the mortgage, how long it is taken out for, and other factors.
The average UK standard variable mortgage rate (SVR) is 4.6%, according to financial data provider Moneyfacts. Someone on that rate with a £200,000 outstanding mortgage balance and 25 years remaining would pay £28.72 a month extra (a payment of £1,151.77, up from £1,123.05) if the rate goes up by 0.25%, assuming it is on a repayment basis.
If there were a series of rate increases, and the rate was to go up by a total of one percentage point (ie, four lots of 0.25%), the extra cost would be £117.10 a month, or more than £1,400 a year.
So what should those with mortgages do?
Those on a variable rate should ensure they have a buffer in place so they can cope with an increase to their rate. With fixed-rate mortgage deals the cheapest they have ever been, many would say now is the time to think about remortgaging for a fixed deal, or opting for one of these if you are looking at buying a property.
For example, Yorkshire building society has a two-year fix priced at 0.99% until the end of November 2019, for those borrowing no more than 60% of their property’s value.
It is deals such as this that may help explain why, as the banking industry trade body UK Finance said this week, the number of people remortgaging is at its highest since 2009.
Fixed-rate mortgage deals are a type of product where, arguably, the old “buy now while stocks last” salesman’s spiel does apply, because talk of interest rate rises is often followed by lenders repricing their fixed deals upwards.
What about savers?
Savers have suffered years of rockbottom interest rates, and millions will be cheered by news of a likely rise.
It is traditionally said that savers outnumber borrowers by around seven to one, and many banks will be keen to be seen to be passing on the full rate rise to these people.
The average easy access savings account now pays just 0.4% interest. Two years ago the figure was 0.66%, and five years ago it was 1%.
Last month it emerged that cash Isa savings accounts had collapsed in popularity, with a £20bn fall in the amount invested in the space of 12 months – a fall partly blamed on continuing low interest rates.
However, it has not all been bleak in the world of savings. An influx of challenger banks, such as Atom Bank and Wyelands Bank, has resulted in intense competition in the fixed-rate savings bonds market. There are five-year bonds on the market paying 2.5% or more, which is 10 times the current Bank of England base rate.