Nearly 2m homeowners could be immediately affected by the Bank of England (BoE)’s move to raise the interest rate today, with variable mortgage rates hitting their highest level in 13 years.
The Bank’s Monetary Policy Committee voted to increase rates by 25 basis points to 1.25 per cent, a move that will quickly feed into tracker mortgages – 850,000 properties – and many variable rate mortgages, which are linked to 1.1m homes.
The average standard variable mortgage was 4.91 per cent prior to today’s base rate rise, the highest since February 2009, when the average rate was 4.94 per cent, according to analyst Moneyfacts.
Those on fixed-rate mortgages have some protection for now, but when they come to remortgage and find a new deal, they are likely to find that rates have gone up and the number of deals on offer has shrunk.
With the cost of living rising more broadly – felt especially keenly through energy bills, grocery shopping and at the petrol pump – homeowners may be worried about the rising cost of their mortgage.
i takes a look at how the change will affect those with different mortgages and tips on how to minimise the impact of inflation on your bills.
Tracker and variable rates
Base rate rises by the BoE are often quickly reflected in tracker and variable rate mortgages, meaning that this most recent hike will soon be felt by those with this type of mortgage.
Data from Moneyfacts showed that a borrower with a £200,000 loan at 4.91 per cent would have been paying back £1,159 a month, but with today’s 0.25 per cent rise, this monthly repayment increases to £1,188, costing an extra £350 a year.
Research by credit app TotallyMoney added that a 25 basis point rate rise leads to a £150,000 mortgage costing an extra £18 per month, while those with a £400,000 mortgage would need to find an extra £48 per month.
Perhaps most worryingly, without accounting for this most recent rise, the cost of a £150,000 tracker or variable rate mortgage had risen roughly £68 a month since December last year and by £180 a month for a £400,000 mortgage.
Today’s base rate rise means a £150,000 mortgage is up £87 per month since December, and a £400,000 mortgage up £233.
Homeowners who have fixed-rate deals are protected in the short term from rises in interest rates.
However, when their deals end, the hunt for a new fixed rate will likely reveal higher rates, and potentially fewer deals to choose from.
Andrew Hagger, personal finance expert of Moneycomms.co.uk, said: “The latest hike in mortgage payments will be a hammer blow to households up and down the country.
“Those customers on a fixed rate will be shielded for now, but when their fixed rate comes up for renewal, some will face a triple-digit monthly payment increase.”
Research this month from lender L&C Mortgages showed the average rates of the top 10 lenders’ two-year fixed rates had – prior to today’s interest rate rise – trebled since the low point in October last year.
The average lowest 2- and 5-year fixed rates both rose above 2.7 per cent this month.
“That is a sharp increase from the historic lows of last October when the average 2- and 5-year fixed rates were at just 0.89 per cent and 1.05 per cent respectively,” the lender said.
Data provider Defaqto added that mortgages had seen a sudden jump in the past two months as lenders move to bake in current and expected future rate rises.
“In April this year, the best interest rate for a 2-year fixed mortgage at 75 per cent loan-to-value was just 1.95 per cent,” the firm said.
“In two months, this has jumped to 2.49 per cent. This increase is higher than the underlying BoE interest rate rise (0.75 per cent to 1 per cent prior to today), as lenders prepare for more increases to come.”
Finding fixed deals is becoming even more difficult.
Defaqto said the number of fixed rate offers available had shrunk to 1,953 – similar to levels last seen in March 2021 – and a “significant drop” on what was available only two months ago (2,086 mortgages).
What should you do?
Those on tracker mortgages will see today’s 25 basis point base rate rise reflected in their mortgages, while variable rate mortgages could rise by more or less, depending on the provider.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “If you’re on a variable rate, you might want to fix sooner rather than later. With rates set to keep rising this year, the longer you leave it, the more you’ll pay.
“If you have a fixed-rate mortgage with six months or less left on your current deal, you can apply for a remortgage rate today, and lock in a deal in case rates rise again. If you have longer until your fix comes to an end, there’s time to plan for how you’ll cover the extra costs.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, said borrowers concerned about this and future rate rises may wish to consider a fixed rate, which in some cases could be “reserved up to six months before you need them, depending on the lender”.
He said: “An independent mortgage broker will scour the market to find the best deal for your circumstances; this may be from your existing lender or another provider.
“However, it is worth remembering that product transfers, where you stick with your existing lender, can usually only be arranged up to three months before your deal comes to an end.
“The advantage of staying with your existing lender is that you don’t have to go through a full remortgage application as you would if you were switching to another lender, which may be useful if your income has fallen since you took out the loan.”
Alastair Douglas, chief executive of credit score firm TotallyMoney, added households were already “feeling the impact of soaring inflation” and so an increase in the base rate would be “another blow to the 2m mortgage customers on variable rate deals”.
“Those with a fixed-rate mortgage won’t be impacted, but it’s worth checking to see when the deal runs out to avoid any surprises to your payments,” he said. “If you’re looking to switch to a new deal, make sure you include any fees and charges when calculating the costs.”
And Karen Noye, mortgage expert at Quilter, said that after today’s rise, someone with a mortgage worth £250,000 over 25 years would pay a monthly payment of roughly £970.
“If interest rates climb to 2 per cent, monthly payments would soar to £1,059 – a huge £89 difference,” she said.
“With energy and food prices climbing too, this could spell disaster for families up and down the country.”
But Tomer Aboody, director of property lender MT Finance, said with mortgage pricing edging upwards, many lenders were not passing on the full extent of previous rate rises “due to the highly competitive market”.
He said: “If they want to attract business, they need to absorb a proportion of rate increases; the question is, how long will they be prepared to do this for?”
And that will be a key question for mortgage holders, who may want to ensure they are on the best deal.