Base rate and mortgages: all eyes on December

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With the Bank of England’s base rate remaining at a steady low of 0.1%, the prospect of continued rock-bottom interest rates diminishing sharply.

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Inflation – as measured by the Consumer Price Index – was at a high of 4.2% in the 12 months to October 2021, more than double the 2% target set by the government. This is largely due to a combination of rising energy costs and pressure on supply chains as business reopens post-Covid.

interest rates and mortgages

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Rising inflation is increasing pressure on the Bank of England’s Monetary Policy Committee to raise interest rates at its next meeting, which 16 December,

And with many commentators predicting an increase of 0.25 or 0.5%, it could add to significant costs for homeowners to pay off variable rate mortgages, while new mortgage deals have already increased.

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Winkworth, one of London’s largest chain of estate agents, said: “Even a small rate increase can have a significant impact on mortgage repayment that tracks the base rate… It makes a big difference in people’s budgets.”

For example, if the rate on a repayment tracker mortgage of £200,000 taken over 25 years increases from 3.5% to 4%, the monthly payment will immediately increase to £53.

Borrowers on fixed rate loans will be sheltered for a fixed period of time. But the deals available will be expensive whenever they expire. Lenders take their cues from fluctuations in the base rate, with many already reflecting on a potential increase in their pricing.

Even though the base rate remained unchanged in December, it is expected to rise by early 2022. The bank itself says it could reach 1% by the end of 2022.

record low rates

So what has been the outlook for interest rates to date? The MPC slashed the base rate to a record low of 0.1% at the start of the Covid pandemic in March 2020.

And the trajectory was already on a downward trajectory during the decade before Covid-19.

Rates fell dramatically from 5% to 0.5% after the 2008 financial crisis. In the wake of the Brexit referendum in 2016, the rate again dropped from 0.5% to 0.25%.

However, after 18 months of the current rock bottom rate, there is a growing sentiment within the financial markets that a rate hike is inevitable on either side of Christmas.

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Sarah Coles, personal finance analyst at Hargreaves Lansdowne, said homeowners should start locking in better deals now: “If you’re on a variable rate deal, your rate is likely to increase with any BoE change. Therefore, you may consider securing a certain deal before any turnaround, and when there is some bargaining. Term mortgage rates will go up before any announcement.”

The good news is that mortgage customers with less than six months to walk in on a certain deal can start shopping for a new home loan now. This is because lenders allow you to lock in the rate for up to half a year in advance.

It’s also worth finding out how much the rate hike could affect your future payments. This gives you some breathing room to plan how you can stretch your budget to cover a larger monthly payment once your current deal expires.

What could the rate hike look like?

We asked Hargreaves Lansdowne to present some data showing how a rise in interest rates will affect normal mortgage repayments. The example tables below show two scenarios, one for a typical variable rate mortgage and the other for a fixed rate arrangement.

We have assumed that the current 0.1% interest rate rises to 0.25% in December 2021 and then rises again to 0.5% in early 2022.

Statistics assume that there are 20 years left for the average London home price to run out to £495,000.

Table 1 shows an average variable rate mortgage of 2.32%, while Table 2 shows repayment based on an average fixed rate mortgage of 1.99%.

Both rates reflect the average rates on the asset stock outstanding. In other words, homeowners’ rates are currently available instead of the average rates available on new loans.

From the statistics, monthly mortgage payments could be as high as £88 per month next spring.

Ms Coles said: “The gradual rate of change can lull homeowners into a false sense of security, as it may not feel like much of a stretch to find £33 more in the monthly budget. However, the rate hike The cumulative effect of this can be devastating and, in a few months, life can become more difficult financially if your mortgage payments are £88 more.

Table 1: Example mortgage repayment, assuming a variable rate of 2.32%

mortgage size

£450,000

£400,000

£300,000

£200,000

Current Monthly Mortgage Payment/£

2,345

2,085

1,564

1,042

Assuming monthly payment plus increment / £0.15 percentage point increase

2,378 (+33)

2,114 (+29)

1,585 (+21)

1,057 (+15)

Assuming monthly payment plus increment / £0.4 percentage point increase

2,433 (+88)

2,163 (+78)

1,622 (+58)

1,081 (+39)

Table 2: Example mortgage repayment, assuming a fixed rate of 1.99%

mortgage size

£450,000

£400,000

£300,00

£200,000

Current Monthly Mortgage Payment/£

2,274

2,022

1,516

1,011

Assuming monthly payment plus increment / £0.15 percentage point increase

2,306 (+32)

2,050 (+28)

1,538 (+22)

1,025 (+14)

Assuming monthly payment plus increment / £0.4 percentage point increase

2,361 (+87)

2,098 (+76)

1,552 (+36)

1,035 (+24)

Source: Hargreaves Lansdowne

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