In December 2021 the Bank of England decided to increase interest rates following a year of high inflation on the back of the coronavirus pandemic.
Everyone in the UK will be affected by rising prices – from higher utility bills to simple things like your everyday food shopping and the general cost of living.
It's fair to say that we have seen this coming as interest rates have been at a historic low of 0.1% and, while the rise to 0.25% is going to increase the cost of borrowing and day to day overheads, it is not a time to panic, but it is undoubtedly a time to take action.
First, let's add some context.
Historically, interest rates have been much higher than now, and 0.25% is still very low. The start of the pandemic saw the Bank of England take action and reduce rates because people had less disposable income through not being able to work and businesses closing down.
But, did you know interest rates have been as high as 17%?! That's right, in 1979, Margaret Thatcher raised interest rates to 17% in an effort to combat inflation. In fact, the country only started to see significant drops throughout the nineties. Then following the recession in 2008, there were substantial decreases, and the highest they have been since then is 0.75% in 2018.
So, as you can see, the recent increase is nothing to some generations but, of course, everything is relative.
How does this affect aspiring buyers and existing homeowners?
Although banks have not passed the rise on in full, most lenders have increased their SVR (standard variable rate) by a few points.
Example –
£200000 property value
£180000 balance
25-year term
3.59 SVR Rate Pre Rate Rise
3.79% SVR Rate Post Rate Rise
Payments increase by approximately £19 PCM
As you can see, it's not all doom and gloom, but if rates start to creep up to previous norms of 3-5%, you can quickly see how the monthly payments can start to affect your disposable income and the bigger the mortgage, the more a rate rise will affect you!
What can you do to protect yourself?
First-Time Buyers
If you have a deposit saved now (5% deposit rates are available!), then start looking to see if there are any properties on the market for you. See a broker/bank to get a good idea of how much you might be able to borrow and the rates and costs involved to move forward.
Make sure you get the application in with the lender as soon as you have an offer accepted. This will secure the rate and product you were offered. Just be aware lenders adjust rates frequently along with cashback offerings etc. so if it has been a few weeks since you spoke to your broker/bank, then be sure to touch base to check if rates have moved.
Home Movers
Initially, you need to check your current rate and product with your lender. Many home movers I speak to are locked into rates with hefty penalties, so PORTING may be a good option to save you in fees and charges with your existing lender.
Porting is when you transfer your existing product onto a new property. Speak to your lender or a broker to explore if this is an option.
If it is an old product, the fees may have been reduced, and new rates might be more beneficial. If it is a fairly new product, porting will most likely be the best option. Your existing lender will then look to top your mortgage up with an advance if your circumstances allow it.
BE AWARE – Partial penalties will apply if you are porting and reducing your existing mortgage.
Homeowners (Re-Mortgage)
If your rate is due to end within the next four months, you need to start exploring what rates are out there. The earlier that you do this, the earlier you secure your rate.
Your lender will typically write to you a good six months in advance of this happening, so speak to them or your broker (as they can do the same) to get the new product in place and then sit back for it to start once your current rate ends. Some lenders will let you benefit from the rate a few months in advance of your current rate expiry, so if they are better, then it's a great position to be in.
Ultimately when rates rise, it's time to take action to see how they affect you. After all, our mortgages usually are our most considerable debts, so being a little bit closer to understanding how they work might mean you get it paid off a little earlier than planned!
I hope that helped and as always contact me if you need me 😊
All the best,
Steve Ellis @ WeLocate Finance Ltd.
P.S. If you would like to book a FREE mortgage review with me, click the link below. I always recommend an initial 15 minute chat to understand your circumstances and answer any initial questions you might have.
