What the rate hike means for mortgages, debts and savings | Mortgages
The Bank of England raised interest rates from an all-time low of 0.1% to 0.25% to fight rising inflation in the UK, but what does that mean for the public?
Will my mortgage go up?
Only if you have a variable rate mortgage – usually a base rate tracker or a standard variable rate loan from a lender. A tracker mortgage directly follows the base rate – the fine print on your mortgage tells you how quickly the increase will pass through, but over the next month your payments will likely increase and the additional costs will fully reflect the increase in the base rate. For a tracker that currently costs 2.1%, the interest rate rises to 2.25%.
It’s less easy with a standard floating rate – it can change at the discretion of the lender. Most commentators think there is no reason for banks and building societies not to pass on the full increase, so an increase is to be expected. If your lender wanted to, they could raise the interest rate even further. For example, HSBC’s standard variable interest rate is 3.59%; if it passes on the full increase in paying borrowers, it will rise to a rate of 3.74%. For a Â£ 150,000 mortgage arranged over 20 years this means the monthly repayments increase by Â£ 11.66.
Most borrowers, however, have fixed-rate mortgages. Interest rates have been so low in recent years that lock-in has been attractive, and since 2019 96% of new owner-occupier mortgages have been taken out at fixed rates. In total, 74% of the outstanding mortgages are locked in and these borrowers will not have an immediate impact from the change.
Several million homeowners are no longer burdened thanks to years of low interest rates and forced savings during the lockdown. For them, the tariff increase has no impact on their housing costs.
What about my other credits?
Most personal loans are taken out at fixed rates. So if you take out unsecured loans, you should keep repaying them as agreed. The Finance and Leasing Association does not have a data on the percentage of auto loans and other consumer finance that have floating rates, but it does say that most loans come at a fixed rate.
The credit card prices are variable, but usually not explicitly linked to the base price and are therefore not automatically increased. Card providers are usually free to change prices at will – for example, American Express recently announced that it would pay its cardholders higher fees and blamed the rising costs of offering rewards. They are already at a 23-year high.
What about my savings?
Savers were the losers of years of rate cuts, and when the key rate was cut last year, banks and building societies started a new round of cuts. In the summer, many accounts only paid 0.01%.
Account providers are free to do whatever they want with the interest rates, so the Bank of England’s decision will not necessarily result in a general increase. However, it should leave those who want to attract savings to be offered a better deal.
“It may take a few months for this base rate change to reach floating rate savers, but there is also no guarantee that the rate will be passed on to them in full or at all,” says Rachel Springall, a financial expert at Moneyfacts. co.uk. “If savers see 0.15% passed on, that would mean that on an investment of Â£ 20,000 more they would receive Â£ 30 in interest annually.”
Anna Bowes of the Savings Champion website says that after a base rate hike in November 2017, interest rates only increased on half of the floating rate accounts, and after an increase in August 2018, only 32% of the accounts improved.
“Unfortunately, savers lose under these circumstances, since the savings rates drop more when the key rate is cut and rise less sharply when the key rate is increased,” she says. “The connection between the base rate and the savings rates of the providers has loosened over the years and some providers have not made any rate increases after the last increase in the base rate in 2018 – others with far lower margins than one would expect.”
However, some providers have already started to increase their tariffs in the last few weeks. For example, Hodge Bank recently raised the yield on its one-year fixed-rate bond from 0.9% to 1.25% and the yield on its five-year bond from 1.80% to 2.08%. Last month NS&I raised the interest rate on its income bonds by 14 basis points from 0.01% to 0.15%.
Will it have any further impact on my finances?
If you have a private retirement plan and want to buy an annuity to secure your income in retirement, you can benefit from the increase. Annuity providers invest in government bonds and these are expensive when interest rates are low because other investors want to hold them. When interest rates go up, other investors tend to sell the bonds, which makes them cheaper. This enables annuity providers to offer better returns.
Pension rates have already risen, and a pension increase could help those who are about to retire.
Will that affect the housing market?
A small increase like this is unlikely to have much of an impact – according to Dominic Agace, managing director of estate agent Winkworth, it has been “factored into mortgage costs and buyer expectations” since the bank’s last decision.
Mortgage rates remain historically low, so people will continue to be able to borrow large sums of money. However, further rate hikes and / or persistently high inflation will have an impact as long as lenders’ affordability tests persist. Currently, most lenders use their standard floating rate plus three percentage points when they stress test applicants’ finances, and as their interest rates rise, mortgages that are considered affordable get smaller.
The bank plans to abolish this rule, which would alleviate this problem. However, the monthly bills are likely to continue to be a factor in the affordability review, and as they continue to rise, the amounts people are allowed to take on will decrease.