How Will Interest Rates Affect My Mortgage?
In March 2023 the rate of inflation once again rose in the UK, putting the Bank of England under pressure to increase the base rate further. This base rate increase is now all but a foregone conclusion and many analysts are now asking how much further the base rate will need to rise to combat inflation.
The good news is that this article offers all the insight you need to make a personal decision about remortgaging and how interest rates affect your mortgage.
What is a Mortgage Interest Rate?
When you take any kind of financial agreement, whether it be a loan, credit card or mortgage, there will be an interest rate attached to it. The interest rate represents the amount of risk you pose to the lender in repaying your debt.
For example, if you take a mortgage with adverse credit (a bad credit history) you will find your interest rate is typically higher to reflect the possibility that you may miss payments or fail to pay back the mortgage.
A common misconception about interest rates is that they are purely profit driven. While it is true that the interest rate represents the amount of profit for a lender, there are many factors that determine the set rate of interest.
How Do Lenders Set Their Interest Rates?
Lenders compete to provide as low an interest rate as possible to attract borrowers to their mortgage products.
This is why the mortgage deals available are often much lower than the lender’s Standard Variable Rate. When underwriters calculate the type of interest rates they offer, they will evaluate the overall risk of their mortgage book and competitor actions.
They will also look at the rate they can borrow money at from the central bank, in this case the Bank of England.
If the Bank of England base rate is low, the cost of borrowing from the Bank of England is also low. Banks can then pass on this saving to their borrowers. When the base rate increases, banks and building societies have a higher cost of borrowing which unfortunately gets passed onto customers.
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How Will Rising Interest Rates Affect My Mortgage?
When considering the above-mentioned Bank of England base rate and the cost of borrowing for lenders, your mortgage payments will increase as the base rate increases.
Of course, if you are in a fixed rate mortgage deal, you can weather the increases to the base rate as your mortgage interest rate remains the same.
As an individual with a fixed rate, you are effectively beating the system when it comes to interest rates and benefitting from the lower rate you set your mortgage at before the rate increases.
Overall, you become a higher risk for a lender as they have now got a customer who is unprofitable for them in the current economy. The more fixed rate deals a lender has at a lower than market rate, the higher the risk of their mortgage book (the total amount of money lent through mortgages) becoming unprofitable.
It means that when it comes to remortgage, you may find fixed rate deals that are far above the current Bank of England base rate, because lenders want to reduce ongoing financial risk going forward.
Why Are Mortgage Interest Rates Rising?
Mortgage rates are rising almost in lockstep with the Bank of England base rate. The Bank of England is now in a position where it must increase the base rate to reduce the level of inflation.
Unfortunately, the Bank of England increasing their base rate takes time for the effects to be realised. It can take several months before the Bank of England sees a meaningful impact from any rate increase.
This is why the Bank of England will now need to act more aggressively to prevent inflation increasing further and rates could be increased further over the next 12 months. Previous rate increases to reduce inflation have thus far proved ineffective, creating more urgency for action on the Bank of England’s part.
Should I Remortgage Now?
Remortgaging now could be fortuitous for a few reasons:
- The current rates lenders are offering are based on the base rate today (before any further increases).
- The base rate is likely to increase, and those increases will take time to influence inflation.
- The inflation rate is high, so the base rate will need to increase enough to bring rate of inflation down.
There are two important factors to consider before remortgaging now:
- The Bank of England will eventually bring inflation down and the base rate may be reduced after that point to stimulate the economy
- You may have an Early Repayment Charge or have a long period of time remaining on your deal term making remortgaging unattractive.
In the short term (over the next 12 months) interest rates are likely to increase further to tackle inflation. In the medium term the Bank of England may opt to keep the base rate static at a higher level to ensure inflation is reducing correctly.
The economic outlook for 2025 and beyond is far better and providing the Bank of England tackles inflation meaningfully, we may see interest rates come down.
If you have three years remaining on your fixed rate mortgage, it is likely to be better to wait out your deal term and see how the market lies. If you have less than 12 months on your mortgage deal, it is advisable to speak to a mortgage broker and explore your options for remortgaging.
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It goes without saying that the wider economy and interest rates are complex areas to fully understand – especially in relation to personal financial situations.
You should speak to a mortgage broker in the first instance to get a better understanding of the options available to you when remortgaging.
We are specialists in Market Mortgage, Insurance and Equity Release Brokerage while also providing fee free mortgage advice and arrangement. Contact us today to book your consultation.