It has just been announced that the UK base interest rate has risen to 0.75% – the highest level since March 2009. This was announced by the Bank of England’s Monetary Policy Committee who made the announcement on Thursday 2nd August but what does this mean for household finances? Those on specific mortgage products could be affected so it is important that you understand what this rise means for the country as a whole.
The Bank of England has justified its rise in base rate by arguing that the economy has recovered from its slowdown that occured during the snowy winter (The Beast from the East). The data seems to suggest that the dip in economic output from the first quarter was only temporary with momentum building in the 2nd quarter. Additionally, unemployment is fairly low and predicted to fall further in the coming months.
To look at this rise in context, it is only the second rise in the last decade and will affect savings, debt, investments, financial markets and of course, mortgages! A lot of homeowners will be wondering what this means so we’ve explained in more detail below how a rise in interest rate affects mortgages in the United Kingdom.
It is important to note that a rise in base rate will generally only affect variable or tracker mortgages immediately but 43% of homeowners in the UK are currently on these products. This means that over 3.5 million homeowners in the United Kingdom could face rising costs to service the debt now that the interest rate has gone up to 0.75%.
Essentially, a rise of 0.25% translates to a small monthly increase in payments with a borrower with a £250,000 mortgage on a typical variable rate of 3.99% expecting to pay an additional £400 a year. Of course, this will sound manageable for many but savings could be made by considering your current deal and we could help you with this.
Naturally, most homeowners in the UK are on fixed-rate mortgages with 57% of borrowers opting for these products. These will not be affected immediately but depending on their 2 or 5-year term finishes, consumers will still face bigger repayments at the conclusion of these products. Yet again, the solution could be to simply speak to a broker such as ourselves to see if we can help.
To summarize, there is no need to panic if you are on a fixed rate mortgage as long as you are aware of when your current deal expires. Those on variable and tracker rates will need to consider how the rise will affect their payments and we would recommend speaking to your mortgage provider or ourselves if you are unsure of what to do next.
We hope this has cleared a few things up and feel free to phone us on 0345 873 1234 or email us at email@example.com and we can help!