N.B. On 5th May 2022 the Bank of England voted to increase the base rate once more. Read the latest here.
For the last 12 years, the base rate has been at 1% or lower (historically low). Recent back-to-back increases (three raises in three months) have people understandably worried, particularly about mortgages. The best plan of action depends on your situation so, here’s the breakdown.
If you’re on a tracker or variable rate mortgage
A quarter of people in the UK with a mortgage are on a variable, tracker or standard variable rate. These homeowners should expect their payments to go up with the increase of the base rate, potentially by £100s per year.
If you’re one of these people and this sounds worrying, it’s time to talk to a broker. Trackers and variable rate mortgages work well when interest rates are low but with inflation on the rise and interest rates doing the same, fixing to lock in low rates for the long run might be your best bet.
If your fixed term is coming to an end soon
If you have less than 6 months left on your fixed deal, now is a good time to talk to a broker about remortgaging to a deal with a longer fixed term.
Fixing your mortgage payments for longer will protect you against the stress of further interest rate rises (HSBC predict base rates will hit 1.25% by August 2022).
If you still have 6 months+ left on your deal
For anyone with deals expiring in the second half of 2022, whip out the weighing scales. If base rates do climb above 1% in August, as predicted, it might actually be worth paying your early repayment charge and switching to a better deal. Definitely speak to a broker about this one to firm up the maths.
If you’re on a long-term fixed deal
If you’re on a long-term fix you could remortgage, not to borrow more or get a better interest rate, but to increase the mortgage term. This is because the longer your mortgage term, the lower your monthly repayments.
With inflation rearing its ugly head and the cost of living creeping up, lower monthly repayments could alleviate some major pressure. The downside to extending the mortgage term is that you pay less monthly, but more in the end because you’re paying interest over a longer period of time.
It boils down to how badly you could do with lower monthly repayments but with energy bills and national insurance tax rising whilst income tax thresholds freeze, extending your mortgage term is worth running by a broker.
If you’re not yet a homeowner, but you’d like to buy soon
If you’re thinking about buying, don’t let the interest rate rises get you down.
There are mortgages out there that are designed to offer certainty, by fixing for longer (10 years or more). They’re normally more expensive than shorter-fixes but this is only because you’re protecting yourself from potential interest rate rises, decades in the future.
Chat to one of our brokers about Habito One, our long term fixed mortgage. You can fix for up to 40 years but move house or exit for free. It’s worth considering if you’re anxious about long term rate rises, or even if you feel that this economic squeeze will be temporary.