FAQ: How will an interest rate rise affect my mortgage?

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Interest rates are currently set at 0.5% but with constant media coverage predicting a rise at any point between now and mid-2015, just how will you be affected? In this FAQ, we answer many of the questions around interest rates and mortgages, from the very basic to the more advanced.

What is the base rate of interest and how does it affect my mortgage overall?

The interest rate of 0.5% quoted in the press refers to the interest rate set by the Bank Of England, also known as the ‘official bank rate’, ‘base rate’ or ‘base rate of interest’.

The base rate is the figure the Bank Of England charge consumer banks for lending, which means that it affects bank’s costs. The base rate therefore affects how much a bank charges us, the consumer, for things like our mortgages.

How does this work in practical terms?

The base rate is currently 0.5%, so if a consumer bank or lender wants to make 1% on its mortgage lending, consumers may be offered a mortgage at 1.5%.

If the base rate was to rise to 1% then consumer banks would no longer be making their 1% on a mortgage at 1.5%, so they may increase their standard mortgage rate to 2%.

The above are obviously very simplified examples, as many things can go into consumer lenders calculating their mortgage rate, including individual borrower circumstances. In simple terms though: the higher the base rate, the higher rate banks charge to lend you a mortgage.

Will there be an interest rate rise in 2014 or 2015?

At the moment, no one is sure. There will definitely be an interest rate rise at some point, as 0.5% is a record low for UK interest rates. Currently, some commentators are saying that the base rate will rise in early 2015, but this date is changing all the time and is affected by market conditions and housing demand, amongst many other things.

I have a tracker or variable rate mortgage. What will this mean for me when interest rates rise?

Tracker mortgages are directly linked to the Bank of England base rate, whilst variable rate mortgages are also designed to change with the base rate. If you have this type of mortgage then it is almost certain that your monthly payments will rise when the base rate of interest does. By how much will depend on your lender. If you are concerned about this then it is best to contact us directly, at which point we can advise on your exact individual circumstances and the mortgage you currently have in place.

I have a fixed rate mortgage. What will this mean for me when interest rates rise?

A fixed rate mortgage means that you will have agreed the rate of interest on your mortgage for a defined period of time when you originally took the mortgage out. Be careful though – this period could be as little as two years. If you are outside your fixed period, then your lender has the right to increase the rate of interest on your mortgage, just as they would with a tracker or a variable rate mortgage. If you are concerned about this then again, it is best to contact us directly, so that we can look into your personal situation.

Should I remortgage before interest rates rise then?

This is a common question any time there are rumours of interest rates rising but it is really impossible to answer on a general basis. Whether remortgaging is suitable for you or not will depend on your circumstances, your current mortgage and the mortgages currently available within the marketplace.

What is likely to happen to the base rate of interest after 2015?

As with any change in interest rate, this is very difficult to predict but remember that 0.5% is an all time low, and the base rate has been as high as 17%, in November 1979, although a return to this level is highly unlikely! Many experts predict that rate rises will occur in steps of 0.25%, spread over the next few years. A common prediction is that the Government would like to see interest rates at 3% by 2017.

How could an interest rate rise affect my mortgage in practice?

In this example, if the interest rate was to reach 2.5% at some point between 2015-2017 then it is estimated that a typical mortgage with around £150,000 to repay, would cost the consumer £230 extra per month.

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