How do rising interest rates affect your mortgage repayments?

Homeowners face higher mortgage repayments as Bank of England governor Andrew Bailey has warned of interest rate hikes.

The Bank of England – which oversees the rate of interest on the supply of money in the economy – could be forced into hiking rates above historic lows. It expects inflation to head above 4% by the end of 2021.

A rise in interest rates

Bailey has given no indication of when he expects the increase in interest rates, currently at a record low of 0.1%. But the Bank’s Monetary Policy Committee (MPC) is set to meet in November to decide what to do.

In the meantime, banks are pulling their cheapest mortgage deals off the market in expectations of a rate rise:

• Barclays has already adjusted some fixed rate deals.
• Nationwide Building Society confirmed it is “reviewing” its mortgage pricing.
• Lloyds, the owner of Halifax and the UK’s biggest mortgage lender, has also made some fixed rate deals more expensive.

“If 0.5 percentage points is added to mortgage interest it adds about £50 a month to the cost of a £200,000, 25-year mortgage, or around £120 a month extra to a £450,000, 25- year mortgage”

Laura Suter, head of personal finance at AJ Bell

Financial experts say this behaviour is to be expected – where major banking institutions pull cheap financial products and hike rates on others in anticipation of an interest rise which hasn’t happened yet.

As a result of potential hikes, the annual cost of the nation’s mortgages will rise to a total of £14 billion, with those on tracker mortgages being most affected by a rise in interest rates.

Laura Suter, head of personal finance at AJ Bell, said: “Mortgages rates have been at rock-bottom lows for a long time and many homeowners have never known an environment of higher interest rates, so any rise will be a nasty shock for them.

“And be warned, mortgage providers don’t hang around when it comes to passing on rate rises, so anyone on a tracker deal will see their costs go up immediately.

“If 0.5 percentage points is added to mortgage interest it adds about £50 a month to the cost of a £200,000, 25-year mortgage, or around £120 a month extra to a £450,000, 25-year mortgage.”

Low interest rates vs high interest rates

If interest rates are low, this makes borrowing cheaper and it encourages individuals and companies to borrow more and spend more money.

However, if interest rates are high, this means people get better interest payments on money in a savings account, but it will make borrowing more expensive.

Pete Mugleston, managing director and money expert at OnlineMoneyAdvisor says: “If you’re someone who has a tracker mortgage that is in line with the base rate of the Bank of England, it’s likely you’ll see an immediate impact on your mortgage repayments as interest rates rise.

“It’s also likely that the extra money you’ll pay will only cover the increased interest charges, so although you’ll be paying more each month, you won’t actually be clearing any more of your mortgage debt.”

How does this affect your finances?

Consumers are impacted through increases to their credit card and mortgage interest rates, especially if these loans carry a variable interest rate.

Consumers still have to pay their bills. When those bills become more expensive, households are left with less disposable income.

When consumers have less discretionary spending money, businesses’ revenues and profits decrease.

Mugleston says: “The UK is still trying to recover from a very difficult 18 months, where many people were out of work and therefore struggling to pay their bills.

“Let us not forget that energy bills will also be rising in the coming months and universal credit is being cut back to its pre-covid pay out, even though the poorest may not have financially recovered just yet.

“I’m also doubtful as to whether wages will increase to match inflation, so quite frankly this couldn’t have come at a worse time.”

How to prepare for rising interest rates

Those on a standard variable rate (SVR) mortgage will probably see an increase in their rate in line with any interest rate rise. An impact on your finances can be avoided if you:

• Find out what mortgage you’re on and look for a fixed deal
• Make sure you’re on the best mortgage deal
• Work out how the interest rate will affect you
• Make a financial plan
• Ask for help from a debt advisor
• Boost your credit score to remortgage
• Overpay your mortgage when interest rates are low

Mugleston adds: “When it comes to the cost of living, a rise in interest rates means the price of everyday expenses will inevitably increase; making it more expensive for the average person to maintain the lifestyle they’re used to, thus lowering purchasing power.

“It’s not just our everyday expenses that will be affected, as money put away into your savings, pensions or any other investments could also be lowered.”

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