Will you be able to pay off your mortgage if interest rates rise?
Our supermarket store gets more expensive and so – assuming we can find an open gas station – refuel our car. And rising inflation also makes it increasingly likely that interest rates will rise, which are at an all time high since the start of the pandemic.
Andrew Bailey, Governor of the Bank of England, said at a recent meeting of economists in London that with prices soaring and inflation to 3.2% (and rising) the Bank may have to increase the base rate in 2022. situation closely, âhe said.
What is the base rate and why is it important?
The base rate is set by the Bank of England and is important to homeowners as it serves as a benchmark for the cost of borrowing money – the lower the base rate, the higher the interest rates are low. If the base rate rises, mortgage interest rates will inevitably rise.
What is the base rate now?
Last month / September, the Bank of England agreed to keep the base rate at 0.1%, where it has been since March 2020 to help control the economic shock of Covid 19.
This is an absolutely low level – at the start of 2020 it was 0.75%.
What does the low prime rate mean for mortgages?
Ray Boulger, Senior Technical Director at Independent Mortgage Brokers John Charcol, described current mortgage deals as “on the ground” thanks to a combination of low base rates and fierce competition among lenders.
The lowest rates, for buyers with 40 percent deposit or equity, are just over 0.8 percent for two-year fixed agreements and just over 0.9. percent for five-year agreements.
For buyers with a 10 percent deposit, deposit rates are higher – around 1.8 percent for two-year transactions and 2.5 percent for five-year transactions.
When might interest rates go up?
The start of next year seems likely – politically no one wants to raise rates before Christmas, but unless inflation suddenly drops off, Boulger’s stuff, there will be an increase in the base rate to 0.5. % at the start of 2022 and by the end of the year it could have increased to 0.75 or even one percent.
What can I do to prepare?
Since there isn’t a huge difference between the rates offered for the two and five year offers, Boulger thinks that going for a five year offer would be a wise way to protect yourself against future rate hikes, d ‘more so as you will have to pay a fee to remortgage once a two year agreement expires.
And he suggests anyone looking to buy or remortgage by spring to start looking now.
“A lot of offers from lenders are valid for six months,” he said. “It’s not too early to start looking now if you’re going to get a mortgage in March 2022.”
The exception to this rule is for buyers who expect to move within the next two years.
If my interest rates go up, how much will it actually cost me each month?
If you have a mortgage of Â£ 500,000, your monthly payments, over 25 years, will be Â£ 1,883 per cm at one percent. At 1.5%, that jumps to Â£ 2,000 per cm, and at 2%, refunds amount to Â£ 2,120 per cm.
How high can rates go?
The highest base rate ever in the UK was 17 per cent in 1979, and the 21st century began with a rate of 5.75 per cent in January 2000. The base rate was lowered during the crisis economic, to stimulate the economy, and hit an all-time low of 0.1 percent last year.
Boulger believes that it is highly unlikely that the base rate will increase significantly in the foreseeable future – in part because of the specter of foreclosures characteristic of previous recessions, and to avoid putting additional pressure on companies already struggling to cope with shortages of personnel and raw materials. .
The Bank will need to strike a balance between the need to curb inflation and the need to help support a post-pandemic recovery, especially with the end of the holiday regime.
“And the government borrowed so much money that even a 0.5% increase would have a big impact,” Boulger added. “It’s not in his best interest that rates are going up.”