Threshold Mortgage Advice

Will rising interest rates affect my mortgage?

The latest rise to the Bank of England (BOE) interest rate is set to deliver more woe for some property owners already contending with cost of living rises to fuel, food, and energy. Whether this will impact you directly, however, rests entirely on the type of mortgage product you have.

To elaborate a little further, we’ve put together this simple guide that explains if your mortgage will be affected by interest rate rises, and what you can do if your property is among those impacted.

Interest rates rise to 1% in May 22

The news that the Bank of England has increased interest rates in a continued bid to curb inflation may feel a little like deja vu. May 2022’s rise from 0.75% to 1% marks the third time the Bank of England has raised interest rates since the start of 2022, with the first rise to 0.5% announced in February, followed swiftly by a further 0.25% leap to 0.75% in March.

But while the effects of these interest rate rises aren’t expected to lower inflation any time soon (the Bank of England estimates it will take around two years to return to its 2% inflation target) some property owners will immediately begin to feel the financial impact of these changes.

What this means for mortgage rates

As is customary when interest rates rise, mortgage lenders will also review interest rates on their products. This will have an impact on the monthly mortgage repayments for some borrowers, who may see their repayments increase higher than the new BOE rate.

However, for other borrowers, the rise in interest rates will have no impact whatsoever. They’ll simply continue repaying the same monthly amount towards their mortgage as they did before the BOE increased interest rates.

So, why are some mortgages set to rise while others remain unaffected?

The answer lies in the type of mortgage you’ve taken out, and whether you’re locked into a fixed rate of interest versus a variable one.

Those who have a fixed rate mortgage have entered into an agreement with their lender that ties them into a fixed interest rate for a set period of time – usually two, three, or five years. This means that no matter what happens to the Bank of England interest rate, the interest you pay on your mortgage repayments each month will not change.

In times such as we’re experiencing now, a fixed rate mortgage can protect you from sudden interest rate rises. On the flip side, if interest rates were to fall, you’d still pay the rate of interest you locked into, irrespective if the interest goes down.

What if I’m on a standard variable rate or tracker mortgage?

Tracker mortgages offer a variable rate of interest that often follows the Bank of England’s interest rates. As the BOE has now increased interest rates, you can expect that the rate of your tracker mortgage will also increase, though precisely when this happens will vary by lender.

The other thing to note about tracker mortgages is that they don’t match the BOE base rate, they are set by the lender, often at a percentage over the BOE base rate and will be increased or decreased by an amount determined by the lender when the base rate changes.

Borrowers only tend to find themselves on standard variable rates (SVR) mortgages when their existing fixed rate deal has come to an end. These rates can go up and down at any time, irrespective of BOE interest rate changes. SVR mortgage repayments are also normally higher than what you would typically pay per month under a fixed rate mortgage.

Only borrowers whose mortgage interest rate moves up and down in line with the base rate will be impacted by the interest rate changes, so only those still locked into a fixed rate mortgage deal will be immune from further interest rate rises.

What should I do if my mortgage is going up?

If your mortgage is affected by rising interest rates the best thing to do is to consult a mortgage advisor. Even if you’re locked into a fixed deal which is due to end in the next six months, you can still speak to an advisor now to lock in a new deal before your existing one expires.

A mortgage advisor will be able to look at your entire financial picture and find you the most competitive deal for your circumstances, across a panel of lenders. He or she will compare interest rates, product, and valuation fees to come up with a recommendation that offers you the lowest possible monthly repayments for a term that best suits your needs.

If you’re in this position now, or simply want advice about whether you should stick with you mortgage or switch, send us a message via our contact page.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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