What the interest rate rise will mean for you

The Bank of England has increased its base rate after a decade – here’s how it will affect homeowners and savers

The 0.25% rise in Bank of England base rate to 0.5% may be small, but it marks the first rise in borrowing costs for a decade. Many mortgages will rise in cost, but savers will be looking forwards to better returns.

How much will my mortgage go up?

By about £22 a month, if you are the average homebuyer with the typical mortgage in Britain of £175,000. The 500,000 borrowers on one of the most popular deals, Nationwide’s base mortgage rate tracker, will see their interest rise from 2.25% to 2.5%, taking the monthly bill from £763 to £785 on a £175,000 loan.

Interest rates for first-time buyers

I have fixed my mortgage so I presume this means nothing to me?

Yes and no. Currently 57% of homeowners are on fixed-rate deals, so their monthly payments will remain the same, irrespective of today’s rise. But many are on relatively short two-year fixes, and when they come to an end, the next deal is likely to be more expensive. Some borrowers could be in for a “payment shock” if they fail to remortgage and find themselves on their lender’s standard variable rate. Santander, for example, is likely to raise its SVR from 4.49% to 4.74%.

Separate analysis by the Resolution Foundation shows that in reality only 11% of UK households are immediately affected by the rate rise, compared to 19% a decade ago – because home ownership has declined, and so many of those with mortgages are now on fixed rates.

Will interest rates continue to go up?

The consensus in the City is that there will be at least another 0.25% rate rise next year, and possibly a second. That will take Bank of England base rate to 1%. In the longer term there is talk of the Bank of England “normalising” rates after the most abnormal decade in its history. But few mainstream economists expect the “new normal” to be much above 3%.

If rates continue marching up, what will happen to my repayments then?

Two quarter-point rate rises will add £67 a month take the cost of a £175,000 mortgage – bad, but probably not catastrophic for most households. But if base rate hits 3%, that cost goes up by a far more painful £260 a month for the average borrower. After the 2007/08 crash, the Financial Conduct Authority enforced strict affordability rules to ensure that borrowers could withstand rate rises. Thursday’s rate rise will be the first test of how those rules are working.

Interest rates for Nationwide borrowers

Will it hit house prices?

Any rate rise knocks confidence in the property market, although no one can know by how much. This week Nationwide reported house prices crept up by 0.4% in October – even though most buyers would have known a rate rise was in the offing. Ashley Osborne, head of UK residential at Colliers International said: “We’re not expecting any significant impact on property prices. For months now buyers have been pricing in an expectation that rates will rise, and people are fixing their mortgages for longer than in the past.”

I have a buy-to-let mortgage. What will happen to them?

Base rate rises have a magnified effect upon landlords, who almost certainly have an interest-only mortgage, unlike conventional buyers who are forced to have repayment mortgages. A 0.25% rise in a £200,000 interest-only buy-to-let deal results in a £40 extra monthly cost compared with £25 on a repayment mortgage.

Will savings rates finally begin to improve?

While banks always raise mortgage rates immediately, rises in savings rates tend to come later. But some lenders have already said they will pass on the 0.25% rise to savers. In Nationwide’s case, it said the “majority” of savers will see improvements. Newcastle building society added it will pass on the rate rise in full to all its savers. But bear in mind that banks are generally not chasing after savers’ cash (they are still benefiting from government and Bank of England schemes to fund them) which means that most savers will continue to struggle to earn any more than 1% interest on a standard bank Isa. Don’t pop the champagne corks quite yet.


Patrick Collinson

The GuardianTramp

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