In an effort to combat inflation, the Bank of England increased the base interest rate from 0.25% to 0.5% last week. What does that mean for your mortgage?
“The one in four mortgage holders who have a standard variable rate (SVR) will see their monthly payments rise almost immediately as banks pass on the 0.25% hike to their default mortgage rates,” says George Nixon in The Times.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Remortgaging is still an option
If you have a fixed-rate mortgage, how this rate change will affect you depends on when you last secured your interest rate. Homeowners with a five-year fix that is coming to an end could still get a better deal than when they last remortgaged. The best rate available five years ago for 60% loan-to-value (LTV) was 1.79% from Skipton Building Society. You can still beat that with First Direct’s five-year fix at 1.54%. However, homeowners with a two-year deal coming to an end could see their bills go up. In January 2019 the best rate on a two-year fix was 1.19%, now the lowest offer is 1.3%.
But it isn’t all bad news. Remortgaging could still be a way to offset the rising cost of living. Some people will be able to save more than £200 a month, or in excess of £2,000 a year, by making a simple switch, says Hilary Osborne in The Guardian.
If you are on your lender’s SVR or a tracker mortgage, now could be the time to switch to a fixed-rate deal. Someone with a £150,000 mortgage on Yorkshire Building Society’s SVR, which is 4.49%, who switches from that to First Direct’s market-leading five-year fix at 1.54% with a £490 fee, would shave £228 a month off their repayments.
Solutions for the longer term
Now might also be the time to consider a longer-term fix. Interest rates on ten-year fixed-rate mortgages have been falling in recent months. “Competition in the ten-year fixed rate market is fierce and has emerged as a key battleground for lenders,” Chris Sykes, mortgage consultant at broker Private Finance, told the Financial Times.
Potential borrowers and lenders expect consistent base-rate increases for the next year and beyond, which is driving demand for longer-term products. Lloyds brought out a new ten-year fixed rate deal at just 1.66%. It comes with a £999 fee and is available to borrowers with a deposit or equity of at least 40%.
Another way to counteract rising rates and keep your mortgage repayments low is to improve your property’s loan-to-value (LTV). Lenders reserve the cheapest deals for people who have bigger deposits or more equity built up in their home because they represent less risk.
If a house with 40% equity had to be repossessed, the lender can be confident they will get their money back when they sell it. A property with only a 5% deposit could lose the lender money if they can’t sell it for at least 95% of what it was valued at when the mortgage was taken out.
“If you need to remortgage it is well worth checking how much you need to pay to qualify for the next LTV bracket,” Aaron Strutt from the mortgage broker Trinity Financial told The Times. “If you are locking into a longer-term rate, a small capital repayment may mean that you could qualify for a much cheaper rate.”
Know the true value of your house
You may not need to put your hand in your pocket to improve your LTV. Before you remortgage, get your house revalued. House prices have rocketed over the past year, with average growth of 9.7% in 2021, according to the Halifax House Price Index. The average UK home was worth £276,759 in January – up £24,500 from the same month last year and £37,500 higher than two years ago.
Rising prices mean your house could have increased in value without you lifting a finger. “If you have had work done, you may also be able to get your home revalued and get a cheaper rate,” says Strutt.
-
Is the Financial Conduct Authority really contacting you? How to spot a scamFraudsters are impersonating the City watchdog to steal money from older people. Here is how to spot the scammers.
-
What is crypto?You may well have heard of cryptocurrencies, but it’s important to understand how these risky assets work before diving in
-
Why is Britain's industrial base crumbling?Opinion More and more factories in the UK are closing, and the government doesn’t seem to care. What’s going on?
-
Scotland's former first minister Nicola Sturgeon leaves behind a toxic legacyOn the left, Nicola Sturgeon is seen as something of a political hero. That makes sense… but only if you exclude her actual record in office
-
Why strong currency is the key to upward mobilityChange your social status and your life by saving money in strong currencies, says Dominic Frisby
-
A new wealth tax is a terrible idea. The rich are already being hit by sneaky taxes – Merryn Somerset WebbOpinion Ideologues want to squeeze more tax out of the rich with a wealth tax. They’re already wrung dry, says Merryn Somerset Webb
-
Has your pension plunged in stock market turmoil? How to avoid creating real shortfallsSliding stock markets are no reason to sell out of your pension in a panic, says David Prosser
-
What MoneyWeek writers read and watched in 2024Here's a roundup of MoneyWeek's favourite books, films and TV shows in 2024
-
Lloyds Bank returns with £175 bank switch bonus – is it worth moving banks?Lloyds Bank is offering customers £175 to move to one of its Club accounts. We look at whether it’s worth taking advantage of the bank switching bonus
-
Parents face £1,000 'nanny tax' – how to afford itHiring a nanny is about to become even more of an expensive hassle for families, especially those in London. Here's how to cut costs
