N.B. On 5th May 2022 the Bank of England voted to increase the base rate once more. Read the latest here.
The Bank of England just raised the base rate again. Feeling a sense of deja vu? That’s because this is the third rate rise in three months.
The base rate has been raised from 0.5% to 0.75%. The increase looks small but could pack a punch for homeowners so our CFO, Martijn, has taken time to advise on how to manage your mortgage right now.
(For full effect, read the following in a soothing Dutch accent.)
Hello, my name is Martijn and I’m Habito’s CFO.
Let’s start at the very beginning: inflation is a term used by economists to describe money becoming worth less over time. They measure inflation by looking at what a certain amount of ££ can buy you from one year to the next.
The Bank of England uses interest rates to help control inflation - like turning a tap on and off. Right now, worldwide demand is rising for all sorts of goods and materials. As a result, prices for products, like food and energy, are rising - and so is inflation. The Bank can offset rising inflation by raising interest rates. This makes it more expensive to borrow money, so people spend less and save more (because they also get better savings interest rates). This drives demand down, prices fall, and inflation decreases.
But what does all this mean for homeowners?
This rate rise could have an impact on your monthly statements. If you have a tracker mortgage, the change will be immediate, but if you’re on a variable rate it’s up to your lender. Today’s base rate increase to 0.5% could see your payments go up by hundreds of pounds a year. But you’re also a free agent, mortgage-wise, so you can remortgage to a fixed-rate deal and lock in a rate whenever you choose.
If your fixed deal is ending soon, now is a good time to consider remortgaging to a new deal with a longer fixed term. We’re seeing more customers opt for 5-year and 10-years+ deals. Fixing your mortgage payments for longer will protect you against the stress of further interest rate rises - and it does look like there are more on the horizon: HSBC predict base rates will hit 1.25% by August 2022.
You could still remortgage if you want to lock in a rate for the long term, but watch out for Early Repayment Charges. They’re set by your lender and could end up costing you thousands of pounds. However, in some instances, it could be worth hitting the ejector button on your current deal, taking the hit on your ERCs, and locking in a lower-rate long-term fixed deal now. Your mortgage broker will help you weigh up your options.
You don’t have to worry about interest rates until it’s time to remortgage. Unless you’ve got our Habito One mortgage, in which case, you never need to worry about rate rises again. Hooray!
If you’re planning to buy soon, you should speak to your broker about long-term fixed rate mortgage deals. For example, Lloyd’s have just launched a 10-year fixed rate deal at just 1.66% interest - but watch out for those ERCs, which could make switching very expensive later down the line.
There are some long-term fixes, like Habito One, that have no ERCs. Long-term fixed deals might not be right for everyone, but they offer rate certainty for a decade or longer, which can be very reassuring in a very unpredictable - dare we say unprecedented? - world.
If you’re not planning to buy for a year or more, the housing market could look quite different (if interest rate predictions come to pass). Historically, when interest rates rise, house prices go down because borrowing money gets more expensive. However, the lack of homes on the market at the moment could keep house prices high. And since when did the housing market do what we expected?
If you’re worried about the affordability of your monthly repayments, in light of rising energy costs, inflation, and additional National Insurance payments coming in April, there are things you can do to lower the amount you pay every month. From remortgaging to a cheaper deal, to lengthening your term, don’t suffer in silence - speak to your broker and your lender about your situation to see what they can do to help.
This isn’t a message of doom and gloom. 74% of UK homeowners are on a fixed rate deal, so today’s base rate rise won’t have an immediate impact. And if you’re not currently protected by a fixed rate, there are steps you can take to minimise the effect on your finances.
Our mortgage experts are on hand to find you a new deal, discuss your options, and allay any interest rate anxiety you might be dealing with.
For advice on your mortgage options, talk to a Habito broker today.
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