Is a rate rise on the cards again?

Barclays, Natwest, Halifax and Nationwide Building Society are among those who have made changes to selected fixed rate deals, and the longer the list of major players that tweak rates, the more likely it is that other lenders will follow suit. Since mid-September, more than 20 lenders have upped their rates.

Headlines exclaiming that mortgage rates are rising are in stark contrast to those of new record low deals that have dominated the papers in recent years, and serve as a reminder for homebuyers and those looking to remortgage to take advantage of the cheapest deals while they are still available.

Key points

Recent months have seen growing speculation that a rate rise could be imminent.

The expectation of a rate rise has pushed up swap rates.

There is likely to be a spike in remortgage activity following an increase.

What will an increase in rates mean?

The impact of a rate rise for homeowners with mortgages will of course depend on their individual circumstances and what sort of deals they are currently on. 

Many people have taken advantage of rock-bottom fixed rate deals in recent years, so are benefiting from low monthly payments that will not change even if the base rate does go up.

But according to research, over a third (36 per cent) of homeowners – equivalent to around 4m people – are still on standard variable rate mortgages, so are likely to be hit by higher costs if there is an increase.

For example, someone with the same £150,000 25-year mortgage paying an average standard variable rate of 4.74 per cent would see their monthly payments increase from £854 to £876 if their lender passed on a 0.25 percentage point increase in full, adding more than £260 to their annual mortgage costs.

I would therefore expect to see a spike in remortgage activity following an increase, as borrowers that have so far failed to do anything to react to higher payments. 

It is not just those on standard variable rates (SVRs) who will feel the impact of higher rates. Those on trackers will also face higher monthly costs, as any base rate rise will be automatically applied to the mortgage rate. It will be interesting to see if those without early repayment penalties consider moving to a fixed rate deal to provide them with greater budgeting certainty going forward. 

Perhaps the bigger dilemma facing homeowners looking to lock into fixed rate deals now is how long they should fix for.

Short-term fixed deals – typically those lasting two years – currently offer the lowest rates, but given current ongoing political and economic uncertainty as Britain’s Brexit negotiations progress, borrowers may prefer to lock in for the medium or long-term.