As interest rates rise, what does it mean for your mortgage? (Joe Giddens/PA)
(Picture: PA Archive)Millions of homeowners will be facing higher mortgage costs and greater pressure on budgets after yet another hike in interest rates.
The Bank of England raised interest rates on Thursday by 0.25, taking them to 1.25 per cent – the fifth rise in a row since December 2021 from the rate setting Monetary Policy Committee (MPC).
For the majority of mortgage holders on fixed rates it will make no immediate difference but the rise will mean a hike in costs for nearly 1.9 million people on a variable or tracker mortgages which move automatically in line with interest rates.
In anticipation of further base rate increases, mortgage rates have been rising steadily in recent months. The cost of the average two-year fixed rate is now three times more expensive than last October, according to figures from L&C Mortgages.
According to UK Finance figures, 1.3 million fixed-rate mortgage deals are ending at some point this year, which will mean many borrowers will soon have to refinance at a higher rate.
Last night HSBC increased their five-year fixed mortgage offer from 2.61 per cent to 3.21 per cent. A difference of almost £80 in monthly payments for a £250,000 loan with a 25-year repayment term.
How will rising interest rates affect a variable mortgage?
According to UK Finance, 75 per cent of borrowers are on a fixed-rate mortgage. However, at least 12 per cent of borrowers are paying their lender’s standard variable rate, which is tied to the Bank of England’s base rate.
According to figures compiled by credit app TotallyMoney, the 0.25 interest hike will result in a monthly rise of £18 for mortgage-holders with a home valued at £150,000 and a repayment term of 25 years. This rises to £30 a month for a £250,000 property and £48 a month for homes worth £400,000.
TotallyMoney’s data also shows the total increases for those on variable rate mortgages since November 2021 when interest rates first started rising.
Amount borrowed |
£150k mortgage |
£250k mortgage |
£400k mortgage |
Extra monthly cost compared with Nov 2021 |
£87 |
£146 |
£223 |
Alastair Douglas CEO TotallyMoney said: “With households already feeling the impact of soaring inflation, an increase to the base rate will serve as another blow to the two million mortgage customers on variable-rate deals.
“Those with a fixed-rate mortgage won’t be impacted, but it’s worth checking to see when the deal runs out to avoid any surprises to your payments. If you’re looking to switch to a new deal, make sure you include any fees and charges when calculating the costs.
You can check how much your mortgage is likely to increase with L&C’s mortgage rate calculator.
What if my fixed-term is coming to an end?
If your fixed-term mortgage is coming to an end, you could be pushed onto your lender’s standard variable rate. However most mortgage providers will let you lock into a new deal three months — or in some cases six months — before your current one ends.
Simon Gammon, Managing Partner at Knight Frank Finance, said: “Lenders are repricing their product lines rapidly, often as much as twice a week. All are swamped with applications to remortgage, so are repricing both because interest rates are rising and because nobody wants to be the cheapest on the high street for fear of being overwhelmed.
“Homeowners with a mortgage up for renewal or borrowers looking to buy should act now, because waiting just a couple of months is likely to mean hundreds of pounds extra in interest payments each month”.
Rachel Springhall, Finance Expert at MoneyFacts added: “Considering the different terms of deals in the market and the rise in the cost of living, borrowers looking for peace of mind may want to consider fixing for longer, such as with a five-year fixed mortgage.
“Seeking independent financial advice is always a good idea not just to check the current deals but to also offer guidance when it comes to eligibility criteria and take away any anxiety of monitoring a direct application.”
What if I am a first-time buyer?
First-time buyers are already under great strain, grappling with sky-high rents and the worsening cost of living crisis. There is more bad news, as the consecutive rise in interest rates has also led rates to creep up on 90 per cent LTV mortgages, aimed at first-time buyers.
The first two rises had relatively little impact on low deposit mortgages, but the third and fourth both resulted in rates on 90 per cent mortgages increasing. The cheapest two-year and five-year rates have risen by around 0.15 per cent this month, according to a report by consumer magazine Which?
Charlie Ellingworth, founder of buying advisor Property Vision said rising interest rates will have the greatest effect on new applicants for mortgages.
He explained: “The main determinant is not going to be the headline interest rate itself but the effect of inflation, particularly energy prices, on people’s monthly expenditure, and hence the income available to service a mortgage. The computer will be saying ‘no’, or certainly ‘less’, a lot more.”
Springhall added: “Aspiring property owners will know that the affordable housing is very much in short supply, so there needs to be significant changes to the market to turn this around. House prices are rising and are unlikely to slow in the short term, this means would-be buyers may find they need to wait longer to build a deposit.
“Due to the rising cost of living, aspiring home-owners may find it difficult to make bigger monthly savings towards a deposit, especially if they are spending a large portion of their salary on rent. Cutting down on non-essential outgoings is wise but buyers also need to be conscious of any hikes to their utility bills or the cost of commuting in the months ahead.
