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How the interest rate increase affects homeowners and home buyers

How the interest rate increase affects homeowners and home buyers

For the second time in six months, the Bank of England interest base rate has risen. The first increase came in November 2017 when it rose from 0.25% to 0.5%, and it has now increased to 0.75%. But how does this impact current homeowners with mortgages and first time buyers looking to secure a mortgage?

The Bank of England base rate explained

The Bank of England is the UK’s central bank, and they set the base interest rate. This is what they charge when lending money to commercial banks, such as the ones you would look to for a mortgage or savings account.

The majority of banks then use this base rate to determine the variance in their own savings and mortgage interest rates. If the base rate goes up or down, typically so do interest rates.

How the base rate affects variable and fixed rate mortgages

There are two types of mortgages; variable rate (or tracker mortgages) which follow the change in base rate, and fixed rate mortgages which are a fixed rate of interest for a specified time period (i.e. 2 years, 3 years, 5 years).

If you are currently on a variable rate mortgage, the interest rate change will mean an immediate increase in your monthly payments. However, as the increase is only 0.25%, for most people this should be manageable.
For example, a homeowner with a £250,000 property on a variable mortgage, took out over 30 years with a 10% deposit, would see an increase of around £30 per month in their payments. You can work out your increase using our mortgage calculator here.

If you’re on a fixed rate mortgage, the rise will not affect you today. However, when you come to the end of your fixed term, you may find that the interest rate deals available will have increased slightly in line with the new base rate, and will inevitably cost you slightly more.

How the base rate affects first time buyers
 
Research by Moneyfacts has shown that for those with a 5% deposit, the average two-year fixed mortgage interest rate has increased from 4.16% to 4.26%.

However, first time buyers should not be disheartened. Mortgage lenders are still offering deals to entice those with lower deposits, and with the government’s Help to Buy scheme allowing buyers to top up their deposit by up to 20%, buyers can then access a 75% or less mortgage, offering much lower interest rate deals.

Get professional mortgage advice

If you’re currently in the market for a new home and are worried about how the interest rate will impact you, speak to one of our recommended independent mortgage advisors. They can advise the best mortgage option for you.

Find your local development and arrange a personal appointment to speak to someone today. 

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