Mortgage borrowers warned ‘take action now after rate rise

Martin Lewis gives advice on rising interest rates

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The Bank of England has been progressively raising its base interest rate since the start of the year in an effort to curb rocketing inflation. Interest rates are increased to discourage spending and reward saving, however, with higher rates can come higher mortgage repayments, which undoubtedly comes as a concern to homeowners and potential investors.

The Bank of England Base Rate has now been raised to 2.25 percent, the highest level in 14 years.

But while the interest rate increase is in place to help temper price rises, it will inevitably add further pressure to many households – especially at a time everyone is feeling the financial pinch.

So, how exactly might the raise in interest rates impact mortgages and the property market?

Interest rate increase impact on mortgage borrowers

On the 2.25 percent rate, Claire Flynn, mortgage expert at money.co.uk said: “Mortgage borrowers are likely to suffer from increasing interest rates.

“For those on a fixed-rate mortgage, changes in interest rates will not apply until the end of your fixed period. However, for those on a variable-rate mortgage, such as a tracker or discounted deal, the impact is likely to be much faster, resulting in an increase in mortgage repayments.

“Tracker mortgages are aligned with the Bank of England’s movements, whilst discounted mortgages are determined by your lender and based on their standard variable rate (SVR).”

But while the SVR is not explicitly linked to the Bank of England’s base rate, it is likely to be influenced by it, according to Ms Flynn.

She explained: “When a fixed mortgage deal ends, you’re normally reverted to the lender’s SVR. However, SVRs are usually higher than previous fixed rates and so your monthly mortgage repayments will increase.”

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What does the increase mean for landlords?

Buy-to-let mortgages are designed for investors intending to rent out the property to tenants. Typically, these landlords use interest-only mortgages to help generate more cash flow.

However, Ms Flynn said: “Soaring borrowing costs, insurance premiums and maintenance fees are all thought to be putting prospective and current landlords alike off the buy-to-let market”.

Some landlords have been taking action by passing on the higher borrowing costs to their tenants, increasing rental prices to combat falling profit margins.

Yet, this is likely to leave many renters in financial difficulties and distress due to the overall living cost pressures across the country.

But, it might not be all bad news for tenants who would like to get on the property ladder.

Ms Flynn said: “With landlords turning their backs on rising mortgage interest rates, there could be an increasing number of properties on the market, potentially providing more options for first-time buyers.

“The housing market momentum may also be showing signs of slowing, with Halifax reporting a 0.1 per cent month-on-month fall in house prices across the UK in July.”

Commenting on the news, Adrian Anderson, director of property finance specialists, Anderson Harris said the increased interest rate: “Is a 50 basis points hike and takes borrowing costs to their highest levels since November 2008.

“The Bank’s monetary policy committee were split five-four on the rate hike. Experts are anticipating more large rate hikes later in the year and into 2023, which is going to heap misery on mortgage payers and have a severe impact on households’ disposable income.

“The message to mortgage borrowers is very simple – don’t wait, take action now, as it’s likely the situation will get worse in the short term. Borrowers are actively shopping around and seeking to fix their mortgage payments now before the monthly mortgage pain gets even worse.

“This is a huge reality check. The landscape has changed quickly, we are no longer living in a period of ultra-low interest rates with plenty of disposable income; our outgoings are increasing faster than our income and we are going to have to adjust quickly and get used to the new norm.”

How to keep mortgage repayments down

Those whose fixed-rate mortgage is coming to an end soon may want to consider changing their deal early to take advantage of interest rates before they increase again, according to Ms Flynn.

However, she continued: “Remortgaging before your current deal ends could mean you’ll need to pay an early repayment charge (ERC).

“You should compare the cost of the ERC to how much you think you could save by remortgaging, to ensure that switching early is worthwhile.

“The critical eligibility factors when you remortgage are your credit rating, your income and affordability, your loan-to-value (LTV) and your overall financial position.

“If you were eligible for a mortgage before, you should be able to find a remortgage deal now. However, if your financial circumstances have changed significantly, you could find that the deals available to you are worse or you may struggle to remortgage at all.”

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