Bank of England interest rates rise to 0.75%
The Bank of England’s Monetary Policy Committee last week announced that their interest rate will increase from 0.5% to 0.75% on 2 August 2018; the highest percentage since March 2009. Whilst this may mean that the interest rates in your savings account may increase, this does also mean that payments on mortgages for many homeowners may increase slightly. Statistics show that more than 3.5 million out of 9.1 million residential mortgages are on a variable or tracker rate. Pam Kamel, Commercial Property Paralegal, explains here what this means in a practical sense for UK home owners, as well as the impact on first time buyers and buy to let investors.
Will my mortgage monthly repayment increase?
If you are a homeowner with a mortgage, you will most likely have taken a mortgage product whereby the interest rate would have been ‘fixed’ or ‘discounted’ (the lender’s standard variable rate with a discount) for an initial period of time (often referred to as the scheme period and typically between 2 - 5 years). In recent years, with interest rates at record lows the percentage of borrowers who opted for a fixed rate product increased considerably.
Another product option for borrowers which has become more popular in recent years is a tracker mortgage whereby the interest rate of your mortgage tracks the Bank Base Rate (“BBR”) with a margin added, for example BBR + 1%. Therefore, borrowers on discounted or tracker rates can expect changes in their payments when the BBR changes.
If you have selected a fixed rate product and are still in the scheme period, your mortgage payment will remain unaffected until the scheme period ends. For borrowers on discounted and tracker rates, the monthly payment will increase. Likewise, borrowers who are no longer in the scheme period and on the lender’s standard variable rate will see payments increase.
If you fall into the category whereby your mortgage payment will be increasing you will receive notice in writing from your lender following every interest rate change with confirmation as to how much your mortgage payment has increased by and when this change will take effect from. Typically, your mortgage payment change will take effect on the 1st day of the month following the Bank’s announcement of a rate change, i.e. for the most recent change in August 2018 your mortgage payment is likely to change on 1st September and therefore September’s payment will be higher.
How much more will I be paying monthly?
It is difficult to state exactly how much monthly payments will increase by. The amount that your mortgage payment will increase by will depend on the length of your mortgage term (e.g. 25 or 35 years) and whether you have an interest only or capital and interest repayment mortgage.
Of course, borrowers on fixed rate mortgages still within the scheme period will see no change in their mortgage payments. That said, borrowers who fall into this category must be aware that the rate of interest they will revert to once the scheme period ends is likely to be higher than was previously illustrated when they took out that particular product.
As an example, for a borrower with a £100,000 capital and interest repayment mortgage taken over a 25 year term, the recent 0.25% uplift in the interest rate will mean an extra £12.00 per month. This increases very slightly to an extra £13.00 per month for borrowers who took their mortgage over a 35 year term. For borrowers who have an interest only mortgage the payment will increase by just under £20 per month, regardless of the term of the mortgage.
If you have not yet been made aware of the impact the rate change will have on your payment, w
I am about to exchange/complete on a property purchase. What should I do?
We advise that you speak to your lender directly to make sure that the current product offered to you isn’t affected. A mortgage lender can withdraw their offer at any time, should circumstances change. This means that if your lender feels you will struggle with your monthly payments due to the increased interest rates, they have the right to withdraw their offer to you. It is important to note that once contracts are exchanged you are committed to purchasing the property.Please therefore ensure that you satisfy yourself on this point before proceeding to an exchange of contracts.
It is worth remembering that for borrowers on a fixed rate mortgage, as mentioned earlier, you will remain unaffected in the immediate years by the recent increase.
I am a buy to let investor. Should I continue to invest in properties?
The economic market can never be predicted just as working in the property market is never predictable. However, as you will be aware, the Bank of England has increased their base rate at a nominal value in order to curb inflation amongst other factors. Whilst this may mean that your monthly mortgage payments will increase, no doubt this will translate over time into higher rent charged to tenants. If all landlords slightly increase their rent demands, this will remain in line with similar properties in the area and will therefore stay steady with inflation.
I am a first time buyer, what do I do?
It is always worth speaking to a mortgage advisor who is best qualified to advise you accordingly. There are several factors to take into consideration, such as the term of your mortgage, and whether you want to take out a mortgage on an interest only or repayment basis. Mortgage advisors are in the best position to let you know which products are best tailored for your needs. We suggest that you speak to several mortgage advisors (many do not charge a fee for an initial conversation) and directly with lenders, to ensure that you choose the best offer available.
How can I minimise the increase to my monthly repayments?
The short answer to the above question is to opt for a fixed rate mortgage. However, for borrowers who are out of their scheme period we would suggest that you review your options to see the rates that may be available from other lenders and compare this to a rate that your current lender may offer you to stay with them.
The mortgage market is ever changing and it remains difficult to keep abreast of changing interest rates. Many of our clients seek advice from mortgage brokers who are able to compare and contrast the rates from many different lenders.
Irrespective of the arrangements you make, our suggestion is that you review your mortgage options regularly and try your best to stay within your budget. This will include factoring in potential increases to your mortgage payment over time so that you won’t receive any nasty surprises over the course of time.
Whilst we are not qualified to advise you as to which type of mortgage you should obtain, we are here to discuss any legal queries you may have. As part of our due diligence when acting for those buying or mortgaging a property, we prepare a concise mortgage report for you. If you have any queries, please do not hesitate to contact us on firstname.lastname@example.org or by calling one of our offices:
Fareham: 01329 222096
Southampton: 023 8071 7410
Portsmouth: 023 9277 6549
Chandler’s Ford: 023 8071 7467
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.