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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 mortgagesFixed 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. 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 mortgagesVariable or tracker mortgages
Most homeowners - 56% - are on a Single 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. 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 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. 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. Someone on a £150,000 interest-only mortgage might pay £31 more.
Long-term impactLong-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.
AdviceAdvice
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.
SaversSavers
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.