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How would an interest rate rise of 0.25% affect me? | How would an interest rate rise of 0.25% affect me? |
(2 days later) | |
The governor of the Bank of England, Mark Carney, has suggested that interest rates could rise before the end of this year. | The governor of the Bank of England, Mark Carney, has suggested that interest rates could rise before the end of this year. |
So how would a rise of 0.25% affect borrowers, and savers? | So how would a rise of 0.25% affect borrowers, and savers? |
We know there are more savers than borrowers, so more people are likely to be pleased at the prospect of rising rates, than those who will be disappointed. | We know there are more savers than borrowers, so more people are likely to be pleased at the prospect of rising rates, than those who will be disappointed. |
Fixed rate mortgages | Fixed rate mortgages |
According to the Bank of England, 44% of homeowners are on fixed-rate deals, so will not be affected by any immediate rise in rates. Currently 90% of new home-owners are on fixed deals, and they tend to have the largest loans. However, depending on when their two or five-year term finishes, borrowers will inevitably face higher repayments eventually. | |
Variable or tracker mortgages | Variable or tracker mortgages |
Most homeowners - 56% - are on a standard variable rate (SVR) or a tracker mortgage, so will, in theory, be affected by a rate rise. However, as the Bank of England cut rates, most lenders did not cut their SVRs at a similar pace, leaving many people still paying around 5% a year. | |
Such lenders are unlikely to increase their SVRs until there has been a significant rise in base rates - certainly more than 0.25%. | Such lenders are unlikely to increase their SVRs until there has been a significant rise in base rates - certainly more than 0.25%. |
"Lenders with the lowest SVRs - below 5% - are more likely to increase their rates, while those charging more than 5% in many cases won't," says Ray Boulger of brokers John Charcol. | "Lenders with the lowest SVRs - below 5% - are more likely to increase their rates, while those charging more than 5% in many cases won't," says Ray Boulger of brokers John Charcol. |
Those with tracker mortgages, which follow base rate, will see inevitable increases. | Those with tracker mortgages, which follow base rate, will see inevitable increases. |
The table below shows what might happen to a notional mortgage, based on the average mortgage rate of 3.11%, rising to 3.36%. | The table below shows what might happen to a notional mortgage, based on the average mortgage rate of 3.11%, rising to 3.36%. |
Interest-only mortgages | |
There are 2.6 million people on "interest-only" mortgages, according to the Financial Conduct Authority (FCA). Unlike repayment mortgages, which pay off the capital by the end of the term, these mortgages leave borrowers still owing the original sum. | |
While such people are likely to have lower repayments to begin with, they will soon face proportionately larger increases, if on a tracker rate. Using the same rates as in the table above, someone on a £50,000 mortgage might pay an extra £11 a month, if rates went up by 0.25%. | While such people are likely to have lower repayments to begin with, they will soon face proportionately larger increases, if on a tracker rate. Using the same rates as in the table above, someone on a £50,000 mortgage might pay an extra £11 a month, if rates went up by 0.25%. |
Someone on a £150,000 interest-only mortgage might pay £31 more. | |
Long-term impact | Long-term impact |
As Mark Carney is fond of reminding us, the rises in base rates will be small, and the pace will be gradual - reaching about 2% over the next three years. | As Mark Carney is fond of reminding us, the rises in base rates will be small, and the pace will be gradual - reaching about 2% over the next three years. |
So while the impact of the first hike may be small, someone with a mortgage advance of £150,000 could eventually find themselves paying £161 a month more, according to figures supplied by the Halifax, Britain's largest lender. | So while the impact of the first hike may be small, someone with a mortgage advance of £150,000 could eventually find themselves paying £161 a month more, according to figures supplied by the Halifax, Britain's largest lender. |
Advice | Advice |
Experts think it unlikely that existing fixed rates will be withdrawn quickly. But they are unlikely to go any lower. So anyone on a variable or tracker rate may wish to switch to a fixed rate deal. | Experts think it unlikely that existing fixed rates will be withdrawn quickly. But they are unlikely to go any lower. So anyone on a variable or tracker rate may wish to switch to a fixed rate deal. |
'If you are on a variable rate, and would struggle to pay your mortgage if rates rose, it is worth locking into a fixed rate," says Mark Harris, chief executive of broker SPF Private Clients. | 'If you are on a variable rate, and would struggle to pay your mortgage if rates rose, it is worth locking into a fixed rate," says Mark Harris, chief executive of broker SPF Private Clients. |
"There are some really cheap deals on the market, with two-year fixes starting at 1.05% and five-year fixes from 2.14%," he said. | "There are some really cheap deals on the market, with two-year fixes starting at 1.05% and five-year fixes from 2.14%," he said. |
Savers | Savers |
After years of being in the doldrums, savings rates have finally begun to improve. Rates have increased by 10% since June, according to advice site Savingschampion. | After years of being in the doldrums, savings rates have finally begun to improve. Rates have increased by 10% since June, according to advice site Savingschampion. |
The prospect of a rate rise before the end of the year is likely to put even more pressure on savings providers to increase rates. | The prospect of a rate rise before the end of the year is likely to put even more pressure on savings providers to increase rates. |
"It's been a long time coming and I'm sure I can speak for all savers in saying 'bring it on'," said Anna Bowes, director of Savingschampion. | "It's been a long time coming and I'm sure I can speak for all savers in saying 'bring it on'," said Anna Bowes, director of Savingschampion. |