BANK OF ENGLAND RATES INCREASED BUT MORTGAGE RATES SET TO COME DOWN

Despite the latest increase to the Bank Rate, mortgage rates are expected to continue to edge downwards during the coming weeks.

 

The Bank of England has increased interest rates by 0.5% to 3.5% – the highest level since October 2008.
It was the ninth meeting in a row at which the Monetary Policy Committee (MPC) has increased the Bank Rate as it battles to bring down soaring inflation.
The rise adds £60 a month to repayments for homeowners with a £200,000 variable rate mortgage.
Around 850,000 people have a tracker mortgage, while 1.1 million are on their lender’s standard variable rate – both of which move up and down in line with the Bank Rate.
Those on variable rate deals have now seen the cost of their mortgage soar by nearly £380 a month, based on a £200,000 loan, since the MPC first started to hike the Bank Rate from a record low of 0.1% in December last year.
But there was a glimmer of good news for homeowners, as the latest increase was lower than the 0.75% rise imposed at November’s meeting.
Last month saw the biggest single increase in interest rates since 1989, with the exception of the almost immediately reversed hike on Black Wednesday in 1992.
Two members of the nine-strong rate-setting committee also voted to keep interest rates on hold at 3%, while economists think the Bank Rate could now be close to peaking.

 

Why has the Bank Rate been increased?

 

The MPC has been aggressively increasing the official cost of borrowing for the past year in a bid to bring inflation back under control.
Inflation, which measures the rate at which the cost of goods and services is increasing, stood at 10.7% in November.
While this was slightly down on the previous month’s figure of 11.1%, leading economists to predict inflation has peaked, it still remains significantly above the MPC’s target of 2%.
In the minutes accompanying its meeting, the MPC warned it would continue to “take the actions necessary” to get inflation back down to its target.
Despite this, commentators think the tone of the minutes was more ‘dovish’ than previously, suggesting the MPC’s appetite for steep rate hikes is waning.
Economists are now predicting the Bank Rate will only increase to between 4% to 4.25%, down from previous forecasts of 5%, with inflation expected to fall rapidly from the middle of next year.

 

What should I do about my mortgage?

 

Since the Bank Rate was increased in November, fixed rate mortgage rates have actually fallen by around 0.5%.
This fall is due to reductions in the cost of government borrowing – which in turn influences the rate at which lenders borrow money for fixed rate mortgages.
Markets were reassured by new Chancellor Jeremy Hunt’s fiscal plans following the chaos caused by his predecessor Kwasi Kwarteng’s mini-Budget.
Despite the latest increase to the Bank Rate, mortgage rates are expected to continue to edge downwards during the coming weeks.
Even so, if you are coming off a fixed rate mortgage deal, you are still likely to face a significant increase in monthly repayments compared with when you last remortgaged, with the average cost of a two-year fixed rate deal now 3.52% higher than two years ago.
This translates into a £400 increase in monthly repayments for someone with a £200,000 mortgage.
There is some good news if you are planning to remortgage but are worried about passing your lender’s affordability test due to the rising cost of living.
Following a recent meeting with the government and the regulator, lenders have agreed to allow customers who are up to date with their payments to switch to a new mortgage deal without having to do another affordability test.

 

If you are on a fixed rate mortgage

 

If you have a fixed rate mortgage, you do not have to do anything immediately. This is because the interest rate you are paying now will stay the same until the end of your product term, regardless of what happens to the Bank Rate.
But if your deal is due to end soon, you might want to think about remortgaging to a new rate.
Lenders will allow you to book on to a new rate up to six months before your existing one ends.
But with rates currently on a downward trend, you may want to sit tight a bit longer to see if mortgage rates fall further as markets continue to stabilise.
The average cost of a two-year fixed rate deal is currently 6.01%, while five-year ones are 5.80%.
If you take out a new fixed rate mortgage now, you will be locking into these rates for two or five years, depending on which term you choose.
That said, there is no guarantee that mortgage rates will come down more, while the Bank Rate could rise again in the early months of next year.

 

If you are on a standard variable rate (SVR) mortgage

 

The average rate charged on a SVR was already 6.4% before today’s increase to the Bank Rate and it is likely to increase further, as these rates move up and down in line with the official cost of borrowing.
As a result, you will probably want to think about remortgaging on to a more competitive rate in the near future.
If you can afford repayments on the SVR, you may want to wait for a couple of months before remortgaging, in the hope that interest on fixed rate mortgages comes down further.

 

If you are on a tracker mortgage

 

If you are on a tracker mortgage, your rate will automatically increase following today’s announcement.
While you may be considering remortgaging to a fixed rate deal to protect yourself from any further interest rate rises, you are likely to be better off staying where you are.
The Bank Rate is only expected to increase by a further 0.5% to 0.75% from its current level.
If you stay put, the interest charged on fixed rate mortgages may have fallen by the time your current deal expires.
When making a decision, it is important to think about how much slack you have in your budget to afford your mortgage repayments if the Bank Rate rises by more than is currently expected.

 

What can I do if I’m struggling?

 

If you are struggling with your mortgage payments, there are a couple of steps you can take to help make them more affordable.
One option is to increase your mortgage term.
For example, monthly repayments on a £200,000 mortgage on a fixed rate of 6% would be £1,450 if the mortgage was being repaid over 20 years.
But monthly repayments would fall to £1,210 if the term was increased to 30 years, and to £1,150 if it was being repaid over 35 years.
If you do this, it is important to understand that while it will reduce your monthly repayments in the short term, you will end up paying more interest over the entire life of your mortgage.
Another option is to talk to your lender and ask to be put on an interest-only mortgage for a period of time.
Only paying interest significantly reduces your monthly payments, although it does mean that the amount you owe is not being reduced, so you will need to resume full repayments at some point.
If you are really struggling, you could ask your lender for a short-term payment holiday, under which you are given a break from making repayments, while the interest portion of the payment is added to your outstanding mortgage debt.
If you think you may run into difficulties, it is important to contact your lender as soon as possible.
Lenders are obliged by the regulator to work with customers who are struggling with mortgage repayments to find a solution, and they can only repossess a home as a last resort.
But options become much more limited if you have already missed a payment.

 

Key takeaways

 

  • The Bank of England has increased interest rates by 0.5% to 3.5% – the highest level since October 2008
  • But the rate at which interest rates are being increased has slowed and economists think they are close to peaking
  • Nearly 2 million homeowners with variable rate mortgages will see their monthly repayments rise by £60 a month, based on a £200,000 loan