What will an increase in the bank rate mean for borrowing?

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This month, the Bank of England indicated that it may soon raise the interest rate. If this happens, it will affect people or businesses that borrow money.

An increase in the Bank of England interest rate will immediately raise the monthly payments for some standard and commercial mortgages. Tracker mortgages are linked to the Bank of England base rate, so should rise in line with any increase it makes.

Around 90% of new mortgage loans are at a fixed rate and these will not rise if taken out before a Bank of England rate rise, but will increase as soon as the fixed rate period ends.

It is unlikely that defaults rates will rise, as most lenders base their loan approvals on whether the borrower can afford repayments should interest rates increase. Landlords with four or more mortgaged properties face stricter affordability rules from the end of September 2017 for new commercial mortgage applications, which take into account possible hikes in interest rates.

An increase in interest rates could affect the availability of credit for firms. Commercial mortgages and bank loans will be more expensive. As the cost of credit will be higher, some businesses could be put off investing in expansion. Others are already cutting back on development plans because of uncertainty over Brexit.

Even though the cost of borrowing could be more expensive, it is not expected that there will be a significant decrease in borrowing or bridging finance.

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