Good, Bad & Ugly: The Rising Base Rate’s Impact on Mortgages
Reading Time: 8 minutes
The Bank of England Monetary Policy Committee voted 8-1 to increase the Base Rate to 1.75% last week. That's the first time the Base Rate's been above 1.5% since 8th January 2009 (to which it dropped from December 2008's 2%).
When the MPC increased the Base Rate from 0.10% to 0.25% in December 2021, few would have predicted we'd reach this 13½-year high so quickly. And the likelihood is, it won't stop there.
What — if anything — can we gauge from the comments and reactions following this latest increase?
Moreover, what do all these changes mean for the many types of UK mortgage holders?
Well, for those on SVRs or coming to the end of their fixed term, it's time to lock in a new deal. For those with longer left to run, there are options, which we outline here.
How will the base rate rise affect my mortgage payments?
How much (or little) the current rate rises will affect your payments depends on the type of mortgage you have. Or rather, how long you've tied down your current fixed rate.
Based on forecasts for the impending recession (predicted to last until late 2023) and still-rising inflation, the prognosis differs. Worst affected are homeowners on Tracker rates and lenders' SVRs, who comprise more than one-in-five UK homeowners. But even those on fixed deals aren't out of the woods. Here's why:
If you're on a 2-year fixed, it will cost you more than your current deal when it's time to remortgage. Depending on where you are in that cycle will also determine your next move.
If you've just taken out your fixed term, you may want to sit tight. By the time your fixed rate ends, the UK may be out of recession. We'd hope that inflation is under control by then, too.
Does that mean we'll be back down to the low-to-mid 1% mortgages we saw at the beginning of this year? Extremely doubtful. But they may be on a downward spiral from a presumed peak implied by current forecasts and world events.
If your 2-year fixed term is soon coming to an end, you might want to consider your options immediately. The Bank of England has implied that it will "act forcefully" when it meets again in September if things still look uncertain. (Heads up: that was the exact terminology it used prior to this week's 0.50% increase!)
Yes, you'll pay more than your current deal (the average lowest rates now are around 3½%, up 2 points from January 2022 already!). But with inflation — including house prices (year-on-year, +11%) — still rising, the base rate of borrowing may yet get worse before it gets better.
The only way to avoid the worst-case scenario looks like biting the bullet today before you shoot yourself in the foot tomorrow.
Five- and Ten-Year Fixed
If your current 5- or 10-year fixed term is due to end shortly, the same advice applies as the above for 2-year fixes. But to try to look further into the distance with everything that's affecting the economy today is almost folly.
It's incredible to conceive what the economy has gone through in two-and-a-half years. Three years ago, who could have imagined us asking these questions about the immediate future:
- Will we still be in the shadow of a pandemic?
- Will supply chains (or bank staffing levels ever) be back up to snuff?
- Will Russia be withholding energy from Europe?
- Will Ukraine be back exporting grain?
- How will relations between the US and China affect democracy/demography/the global economy?
- And if we genuinely reach for net zero, how will it impact our lifestyles and the cost of living?
I've not got a crystal ball. But if you have a decent length of time to run on your 5- or 10-year fixed term, it seems sitting tight is the best option. At least for now. But, yes. That may change in a heartbeat, too.
Trackers and SVRs
If your mortgage rate is subject to either the base rate or a lender's standard variable rate, expect more change to come. And not the good type.
Since December, we've seen lenders pass on more than the increase in the BoE Base Rate to their customers. Whilst the amount they pass on is at their discretion, those lenders remember the 2008 crisis (with a shudder). They're not going to leave themselves exposed to the global economy again (within reason).
If you're on a tracker or SVR, you should be looking at remortgaging. But here's where we say 'prepare for the worst'.
Not only are interest rates becoming more prohibitive, but lending criteria are too. Just because you were a shoo-in for a mortgage last time doesn't necessarily mean you will be this time around.
Dynamic lending criteria and protracted turnarounds
In the last few months, we've seen countless examples of contractors meeting criteria at the time of application, then failing as the lender redefined 'risk' overnight. This isn't necessarily because the applicant has done anything any different. It's what lenders want from a borrower that's changing.
And these criteria aren't just changing once a month, or so. This is happening daily, which brings me neatly to the next point: don't expect to remortgage overnight!
Contractor mortgage turnarounds have become protracted, going out from 2-4 weeks to 10-12 weeks. Yes, banking in general changing the way it operates post-pandemic is one reason. But the other is the increased paper trail brought on by changing criteria and the backlog this causes at conveyancers and lenders' mortgage departments.
Save yourself the headache
Yes, everything's frustrating, especially how little time everyone's had to react to interest rates rising. But that's the reality of what we're dealing with in the current climate; no amount of shouting and moaning will change it.
So, in summary, here's the thing. Unless you've got a long while remaining on your fixed term, you probably need to remortgage. And it's not going to be as easy as it was a year or even six months ago.
Talk to a broker who can bypass the gatekeepers, who can speak to underwriters who really grasp the reality of your mortgage affordability.
You may think it's quicker and easier to go it alone. But every day we're seeing the effects of borrowers in chains who've been left in the lurch because a lender's pulled out. Don't put yourself in that position.
With rates set to climb even further, sorting your mortgage out sooner rather than later is one less strain on the purse strings as the cost-of-living crisis looks to bite even harder this winter.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.
Posted by John Yerou
on August 8th, 2022 12:16pm in