How does a BoE base rate rise affect my mortgage repayments?

If you have a fixed rate mortgage, the BoE base rate rise in August need mean little to you. At least not yet.

But, when your fixed rate ends (and it will), you'll drop onto your lender's SVR.

Lenders' SVRs are typically much higher than the introductory fixed rate you pay when you take out a mortgage/remortgage. So, when your introductory period ends, that's when you'll see this rise—the first in a decade—affect your repayments.

If you're already on a variable or tracker rate, your repayments will increase immediately. Today's post considers how you'll feel the impact of this increase in your pocket, contractor or not.

The historic low rate had to end someday

For almost ten years, Britons have enjoyed the benefits of the lowest base rate in UK history.

At the beginning of August 2018, the MPC voted unanimously (9-0) to raise that rate.

This is a big deal for the banks and building societies who themselves borrow from the BoE. Instead of borrowing money from The Bank at 0.5% interest, they'll now pay 0.75%.

With mortgages already competitive, it's doubtful lenders will absorb that increase alone. Instead, they'll pass it onto their borrowers, including homeowners with existing mortgages.

Those borrowers not on a fixed rate will feel the pinch almost at once. They could be:

• recent homebuyers on a fixed term introductory rate, often 2- or 5-year deals; or
• large or lifetime mortgage holders at a capped limit.

But for almost half of the UK's homeowners^[1], their monthly payment will go up (if it's not already).

How much more will my mortgage cost?

There's no one formula that will work out how much more every borrower will have to pay. Too many variables affect an individual's capacity to borrow at a competitive rate. Credit rating, deposit, work history, loan-to-value, age when borrowing – all come into play.

The Guardian has put together a generic model of the Base Rate rise impact:

Tracker mortgage repayments (pcm) after base rate rise
and future (hypothetical) 1.5% increase

Current Mortgage	Existing repayment	0.25% increase (BMR 2.75%)	Hypothetical 1.5% increase (BMR 4%)
£50,000	£224	£231	£264
£75,000	£337	£346	£396
£100,000	£449	£461	£528
£125,000	£561	£576	£660
£150,000	£673	£692	£791
£200,000	£897	£922	£1,055
£300,000	£1,346	£1,383	£1,583
£400,000	£1,795	£1,844	£2,110

The long term prognosis: what it means for borrowers

The Guardian later asked outgoing MPC member Ian McCafferty for his forecast for rates. He believes interest rates won't reach the pre-crash highs for at least 20 years, if they do at all.

In the meantime, he does think they'll rise, but at a gradual pace. To counteract that, he foresees wages increasing at similar rates to any borrowing rises.

That said, contractors can become streamlined financial beasts after taking ownership of their finances. They won't want to pay a red cent more than they have to, now or in the future.

The best option for contractors on a variable rate now might be to look at a remortgage.

Will it be as hard remortgaging as it was getting a mortgage in the first place?

I know. You're probably still scarred from the last time you went looking for a mortgage if you chose the wrong path. But hear me out.

You're less risk for a lender if, since taking your last mortgage out, you've:

• been contracting in the same industry for all that time;
• paid all your monthly repayments on time, even better if you've accrued savings;
• seen your income rise in line with the experience and time served in your industry.

If that's your borrower profile now, you might take away better news than you could have hoped for. Using an inexperienced mortgage advisor last time could at least have a silver lining.

If you've paid over the odds up to now, remortgaging onto a fixed rate could save you money! Especially if you sacrificed a competitive interest rate in favour of 'convenience' last time.

Even better: you can switch using your contract rate if you choose the right path this time.

Is now a good time to fix interest rates?

Ask yourself: "What's the worst that could happen if I look to remortgage?"

The best outcome is that you save, as we've outlined above. But what if you don't actually save on a new deal, compared to your current rate?

A remortgage to a new fixed rate will still protect you from further base rate increases during that term. And experts predict that this is the start of an upward-bound trend.

And guess what? When your new introductory period expires, you can look to remortgage again. Next time, you'll have even more experience. You may even then have more savings and equity, bettering your current LTV ratio.

People don't remortgage often enough. We shop around for insurance and phone deals all the time. But the biggest financial commitment we ever make, we hump it around for life.

Times have moved on, and are moving still. What, with Brexit and more rate rises to come, protecting your lifestyle could be an easy, quick fix.

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1. Which? survey results, Fixed-rate mortgages (June 2018).

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