Mortgages  

What does the recent interest rate increase mean for mortgage holders? 

Adrian Anderson

Adrian Anderson

We have just seen the biggest interest rate hike in 27 years.

On August 7 the Bank of England increased the base rate by 50 basis points to 1.75 per cent. The days of ultra-cheap mortgages are over and we are going to have to get used to a new norm.  

With a global inflation crisis driven by increasing energy prices and supply chain issues, the BoE does not have many tools at its disposal to try and choke off the highest level of inflation we have seen for 40 years.

One mechanism they do have is the ability to raise interest rates. We have been living in period of ultra-low interest rates, which were put in place after the financial crash to help stimulate the economy and encourage spending.  

Interest rates have been rising from an all-time low of 0.10 per cent to 1.75 per cent with more increases predicted for the rest of 2022. What does this mean for UK mortgage holders?  

Circa 74 per cent of mortgagors have a fixed rate mortgage. This will be a relief for most borrowers whose monthly mortgage payments will not be affected until their fixed rate ends. 

However, most people will have fixed their mortgage for either two or five years, hence it will not be that long for many borrowers until their rate is up for renewal. This will be a significant blow to many households who are already struggling with higher outgoings.

For those with a mortgage, now is a good time to explore the rate they are paying and consider locking in a new rate.  

After the financial crash there has been strict mortgage regulation in place to help try and prevent another crash from occurring. Anybody who has applied for a mortgage recently will have already been subject to the strict guidelines from the Financial Conduct Authority that the banks have followed. 

This includes banks assessing how much you can borrow based on a multiple of your income/or joint income (usually circa 4.25 to 5 times income multiple) and strict affordability testing, which includes the bank collating details of your current contractual and discretionary monthly outgoings and then stress testing your mortgage payments at a much higher rate than what you would have actually been paying. 

Most regulated mortgages (a mortgage that is secured against a house you live in) may have been assessed at a pay rate of circa 6 per cent to 7 per cent. This may have seemed conservative at the time if you were able to borrow at a fixed rate of sub 2 per cent (even sub 1 per cent fixed at some points during last year). 

Many of the current fixed rate deals available are circa 3.5 per cent plus, and are likely to increase further quickly.