The Bank of England has raised interest rates to 0.75% in an attempt to tackle rising inflation in the UK. This means that the base rate is back to its pre-pandemic level. What does it mean for UK savers and lenders?
Will my mortgage go up?
Only if you have a variable rate mortgage – typically a tracker that follows the basic rates, or a loan at a standard variable rate from a lender.
A tracker mortgage will immediately track the base rate – the slight pressure of your mortgage will tell you how quickly the increase will continue, but next month your payments will likely increase and the extra costs will fully reflect the base rate increase. On a tracker that currently costs 2.25%, the interest rate would rise to 2.5%, £ 18 per month on a £ 150,000 mortgage arranged over 20 years.
Some lenders are moving loans at rates that are explicitly linked to the base rates when their fixed rates come to an end. Santander, for example, has what it calls a follow-on rate that will move lenders who have completed deals since January 23, 2018, at the end of their special offer. Earlier this month, it went from 3.50% to 3.75% after the base rate hike in February, and is now set to hit 4%. This means that since the beginning of December, the monthly repayment of a £ 150,000 mortgage over 20 years has increased from £ 858 to £ 909.
At a standard variable rate, things are less straightforward – these can change at the lender’s discretion. Not all lenders took over the December increase, although they did rise in February. Some, such as Nationwide and Halifax, have both fully surrendered previous increases.
There is no reason for banks and construction companies to not continue the full increase, says David Hollingworth of broker L&C Mortgages. “It makes sense to prepare loans for an increase in line with the base rate,” he says.
Most lenders, however, are on fixed rate mortgages and their repayments will not change. Interest rates have been so low in recent years that the lien has become attractive, and since 2019, 96% of new homeowners’ mortgages have been taken out at fixed rates. In total, 74% of outstanding loans are fixed.
A few million homeowners are now unsecured, thanks to years of low rates and forced savings during foreclosures.
What about new mortgages?
The under-1% mortgage rates that made headlines last summer are a thing of the past, but new loans are still being made at rates that are historically low. However, some commentators think this will stop soon.
Andrew Wishart, a UK economist at Capital Economics, says lenders have absorbed previous base rate hikes into their profit margins, but he does not think there is room for them to do more. “We expect a sharp increase in mortgage rates over the next 12 months,” he says. “Based on our forecast that the bank rate will rise to 1.25% by the end of the year and to 2.00% in 2023, the average rate on new mortgages is set to double from a low of 1.5% in November 2021. at almost 3.0% by 2023. “
This would help slow down demand and house price growth on a crawl, he says.
At the moment, however, there is a big difference between the cost of new dealers and lender SVRs, so anyone who pays a variable rate should consider moving. “Lenders switching from an SVR to a competitive fixed rate can significantly reduce their mortgage payments,” says Rachel Springall of data firm Moneyfacts. She says moving on to a £ 200,000 mortgage arranged over 25 years, moving from an SVR of 4.61% to the average two-year fixed rate of 2.65% would save a loan over £ 5,082 over two years.
What about my other loan?
Most personal loans are taken out at fixed rates, as are most auto loans, so if you have unsecured loans, you should continue to repay them as agreed.
Credit card rates are variable but not typically explicitly linked to the base rate, so will not increase automatically even though they have increased in recent months.
What about my savings?
Savings are the losers of years of rate cuts, and when the base rate was reduced to an all-time low of 0.1% by 2020, banks and construction companies began a new round of cuts. Since last summer, many accounts have paid just 0.01%.
Account providers are free to do whatever they want with rates, so Thursday’s announcement does not necessarily translate to increases anywhere. Springall says not one of the largest high-street banks has passed on the last two base rate increases for savers with a simple access account.
“As we have seen over and over again, there is no guarantee that savings providers will increase their rates due to a Bank of England rate increase and even if they do, it may take several months to get through to customers,” says Springall. “The top rate tables are experiencing a positive rise and there is hope that rates will continue to rise but we can not see any pre-pandemic [savings account] Interest rates for some time to come. “
Anna Bowes of the Savings Champion website says that only 64 of the 158 banks or construction companies have announced changes to some of their savings accounts since the December base rate increase. She says only 33% of all existing variable rate savings accounts have gone up by anything, but only 2.3% due to the full 0.4% increases in December and February.
Will it have a different impact on my finances?
If you have a private pension and want to buy an annuity to earn an income in retirement, you can benefit from the increase. Annuity providers invest in government bonds and these are expensive when rates are lower than other investors want to keep them. When rates rise, other investors tend to sell bonds, which makes them cheaper. As a result, annuity providers can offer better returns.
Interest rates have already risen and an increase in the rate could help those who are retiring.
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