Today, the Bank of England has announced that they are increasing the base rate to 2.25% and it is likely that they may be increased further again this year. Interest rates can have an impact on a wide range of areas including mortgages, borrowing, pensions and savings. The Bank of England is increasing the base rate to try and tackle rising inflation (cost of living) which has been attributed to increasing energy costs, higher prices of goods coming from abroad, a buoyant job market and businesses charging more for their products. It is likely that the Bank of England could increase the base rate further to meet their inflation target of 2%.
It's a wise idea to have a plan in place to deal with any potential interest rate changes. Current forecasts indicate that changes are likely to be small but steady, Moneyhelper (2022) says. Whilst a small interest rate rise may not set alarm bells ringing, several consecutive rises could have a significant impact.
We'd suggest putting yourself in the best possible position and ensuring that you are prepared for future rate rises by acting now, which could potentially help soften the impact. Every person has different circumstances, so we strongly recommend you look at the terms of your mortgage and contact your mortgage adviser to discuss your individual needs and circumstances before taking any further action, to see what would be the most suitable option for you.
How you’ll be affected by an interest rate rise depends on what mortgage you’re on and when your deal comes to an end. If you don’t know, check your paperwork or with your mortgage provider to find out (Moneyhelper, 2022).
The good news is that if your mortgage is on a fixed rate, your monthly repayments are unaffected. Those with fixed rate mortgages are likely to be affected once they reach the end of their current deal. An interest rate rise could make remortgaging more expensive.
If you have a variable rate tracker mortgage that is linked to the Bank of England base rate, you are likely to see an immediate impact on the amount you repay. Those on a standard variable rate (SVR) could see an increase which is decided by the lender. If you are unsure, it is worth checking your mortgage terms and conditions in your mortgage offer document.
If you are on your lenders SVR, please ensure that you get in touch as you could be paying more than you need to be.
For those readers who are still on a variable rate or are coming to the end of their fixed rate period, now is a good time to seek professional mortgage advice and let us talk you through the options available to suit your circumstances.
Once you understand the type of mortgage you have, the first step is to work out what you can afford and a good way to do this is to create a budget which can help highlight any areas where you may need to cut your expenditure and identify savings opportunities. Tactics such as building your credit score could help you get a better deal when it comes to securing your next mortgage.
Depending on your circumstances, there can be measures you can take. It could be that the most apparent course of action is to switch to a fixed-rate mortgage, or if the term of your fixed rate is due to end shortly, you could consider fixing your mortgage rate for a longer period of time.
If you fix your mortgage for a longer time period, for example, 5, 10 years or more, then this could give protection for potential interest rate rises over a longer period of time.
However it is worth noting that fixing the rate for a longer term, may mean that you’re not able to benefit in any rate decreases in the future.
Whether this is right for you will depend on your circumstances, bear in mind that other deals may come on to the market in the next couple of years and you may not be able to switch to them without incurring hefty early repayment charges.
If you’re looking to remortgage within the next six months, it’s a good idea to start looking now. Lots of lenders’ offers are valid for six months. So, it might be a good option to lock one in now, if this is right for you and your circumstances.
If you are on your lender's standard variable rate (SVR), don't hesitate to get in touch with us as soon as possible, as it means that you could be paying much more than you need to be.
Sources:
Moneyhelper. 2022. How to prepare for an interest rate rise. [online] Available at: <https://www.moneyhelper.org.uk/en/homes/buying-a-home/how-to-prepare-for-an-interest-rate-rise> [Accessed 22 September 2022].
The Bank of England. 2022. Why have interest rates gone up? [online] Bankofengland.co.uk. Available at: <https://www.bankofengland.co.uk/knowledgebank/why-are-interest-rates-in-the-uk-going-up> [Accessed 22 September 2022].
