The Bank of England’s Monetary Policy Committee last lifted rates in July 2007, taking the base rate to 5.75 per cent before the financial crisis caused it to plummet. By March 2009, interest rates had fallen to just 0.5 per cent. They remained at this level until August 2016 when, following the UK’s vote to leave the European Union, the Committee vote to trim rates to 0.25 per cent as part of a major stimulus package to prevent the economy destabilising.
To give some idea of the magnitude of impact the drop in rates has had, consider someone with a hypothetical rate of 2 percentage points above base rate. A £150,000 25-year repayment mortgage at a rate of 7.75 per cent would have paid £1,133 per month in 2007. The same mortgage today, at a rate of 2.25 per cent, would cost nearly half this at just £654 a month.
Are rates about to increase?
Recent months have seen growing speculation that a rate rise could be imminent, with many economists predicting that we may see an increase as early as November.
Mark Carney, governor of the Bank of England, has done nothing to allay these thoughts, warning in September that some perhaps do not fully appreciate that rates could rise “over the coming months”. The MPC at that point voted by seven to two members against changing rates in a bid to support economic growth.
It is worth noting though that Mark Carney has previously hinted that a rate rise may be on the cards, only for rates to then hold steady, so there are certainly no guarantees that an increase will happen.
However, the general consensus among economists seems to be that rates will rise, with 31 out of 50 economists in a Reuters poll forecasting a rate hike at November’s meeting. In contrast, in a poll taken ahead of the September meeting, only three out of 59 economists predicted an increase before the end of the year.
Percentage point rise prediction
Nationwide Building Society has said it also expects a quarter percentage point rise in November, but sees any increase only having a “modest” effect on already stretched UK households. This is mainly due to the fact that the majority of new mortgages taken out in recent years have been fixed rate deals that protect homeowners from higher monthly payments when interest rates rise.
However, there are plenty of households who are on variable rate deals and whether an increase takes place or not next month, it is vital for borrowers to ensure they are prepared for higher rates.
The expectation of a rate rise has pushed up swap rates – one of the factors that will determine how lenders price their fixed rates. This has led a growing list of lenders to hike their fixed rate mortgage deals, typically by around the 0.20 percentage point mark, although some fixes have gone up by more than this.
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.
That said, though, longer-term deals such as 10-year fixed rates have so far remained a niche product, not just because they offer slightly higher rates, but as they usually charge a penalty if they are paid off before the end of the fixed rate period.
Whether interest rates increase in November or are held at 0.25 per cent, predictions that they will go up serve as a valuable reminder that homeowners should be prepared for the prospect of steeper payments.
The fact many lenders have opted to increase their fixed rates ahead of November’s MPC meeting shows mortgage costs can rise even when there has not yet been any upward movement in rates.
Mark Carney has consistently suggested that any increases in rates will be “limited” and “gradual”, so there is no need for homeowners to panic that base rate is about to sky rocket.
However, it is vital for them to ensure they are on the best possible deal, and brokers will play an important role in helping them achieve this. For those who would struggle financially if their mortgage payments were to increase over time, locking into a fixed rate deal sooner rather than later could well be the best option.
The good news is that even though many lenders have re-priced their fixed rates in recent weeks, there is no shortage of competitive mortgage deals available. The question is how long they can last.
David Hollingworth is associate director communications of L&C Mortgages
