The Bank of England rate increases – what does this mean for me and my mortgage?

Aug 6, 2022 | First Time Buyer, Mortgages, Re-Mortgage | 0 comments

The ever-growing rise in inflation throughout 2022 has left mortgage owners concerned about the latest and future interest rates as costs continue to grow. In June 2022, The Bank of England (BoE) increased interest rates to 1.25%, intending to help minimise inflation at its highest level in 13 years.

Raising interest rates is a method that causes borrowing to be more expensive, but it can encourage more people to save their money - reducing the demand for goods and services, which, in turn, lowers the price.

The more a person spends, the more demand grows, and retailers and suppliers will take the opportunity to increase their prices for greater profits. When inflation rises, mortgage rates may suffer, and with a UK inflation target of 2%, anything above this will encourage the Bank of England to up interest rates.

The Data

With the next interest rate decision expected on the 4th of August, the Bank of England could raise them again in the battle against inflation. A further rise in interest rates means mortgage owners could see an increase in their monthly repayments, while first-time buyers and existing mortgage customers will notice higher mortgage rates.

According to Moneyfacts, the average two-year fixed rate mortgage is now above 3% - the first time in almost a decade. Not only are mortgage rates affected, but those looking to buy or move house are now looking at asking prices that are 13% higher on average compared to just 12 months ago.

How does high inflation affect mortgage holders?

Sadly, high inflation is not often the best step forward for mortgage holders. As interest rates rise, mortgage rates follow. However, how the rise in interest affects you and your mortgage payments depends on the mortgage you have.

Fixed-rate mortgages will be protected from any increase in interest rates, whereas those on standard variable rates, tracker or discounted products can expect to see a higher rate in their monthly payments. Despite protection from a fixed-rate mortgage, once the plan finishes, a mortgage owner is at risk of higher interest rates, and a competitive deal may not be available.

Despite the market at risk of slowing down, house prices continue to climb this year, with an annual house price growth of 10.5%. That isn’t to say potential buyers or homeowners should worry, as it’s important to remember that house prices have seen a lot of growth in the past two years since the pandemic, and most people will be experiencing a re-balancing act rather than a total crash.

Ways to get around rising mortgage and interest rates

Overpaying your mortgage

If you can afford to, overpaying on your mortgage can help. While not everyone will have the opportunity in such expensive times, those who can should consider it - this will help to reduce debt and get buyers closer to a mortgage-free life, all while decreasing the level of interest to pay.

Overpaying your mortgage could also cut the amount of your property price covered by the mortgage (loan-to-value). Lenders will use the LTV to select the deals they can offer you, and the lower the LTV, the lower the interest rates, potentially leading to a more cost-effective remortgage.

It’s important to remember that some mortgages could leave you fined with an early repayment charge, which is often between 1% and 5% of the balance. To overpay your mortgage beneficially, do your research. Most lenders will allow you to overpay around 10% each year during the tie-in period, but it is important for you to check your specific terms and conditions with your current lender.

Shop around

As with anyone dealing with worrying inflation losses, the best step to take is to re-evaluate your outgoings to see where you could potentially cut costs to reduce the impact. From planning your supermarket shop more efficiently to shopping around for better bills and insurance prices, saving small amounts can positively impact your finances for the future.

Arguably the most expensive monthly outgoing, this advice includes mortgages too. If you are currently on a standard variable rate, you could save thousands by moving to a fixed-rate mortgage. A respectable mortgage broker will be able to conduct relevant research to find the best option for your circumstances.

It is crucial to act fast, as there is no cap on future interest rate increases and mortgage rates could be pushed to a whole new level of high. Those waiting for their mortgage offering to expire in the upcoming weeks or months should shop around and agree to a deal just before the expiry date to prevent paying more each month on renewal.

Speak to a mortgage broker

A mortgage broker has all the experience and expertise you need to get the most beneficial deals and offerings available. Get in touch with Lisa Parmley today to learn more about how the team can help support you.

Your home may be repossessed if you do not keep up repayments on your mortgage. You may have to pay an early repayment charge to your existing lender if you remortgage.