Bank of England Interest Rate Rise – What does this mean for you?

Bank of England Interest Rate Rise – What does this mean for you?

06 Nov Bank of England Interest Rate Rise – What does this mean for you?

The Bank of England announced this week an interest rate rise from 0.25% to 0.5%. Despite it being a small rise, and one that has long been anticipated, it’s the first rise in borrowing rates for a decade. For many homeowners, monthly mortgage repayments will increase, but savers, will be looking at better returns.

Here’s how it will affect both homeowners and savers.

How much will monthly mortgage repayments increase by?

The average homeowner, (typical mortgage of £175K in Britain), can expect mortgage repayments to increase by around £22 per month. The 500,000 borrowers on one of the most popular deals, Nationwide’s base mortgage rate tracker, will see interest rates rise from 2.25% to 2.5%, taking the monthly bill from £763 to £785 on a £175,000 loan.

Fixed rate mortgage deals, are you affected?

At present, more than half of homeowners are on fixed rate mortgage deals, which means their mortgage monthly repayments will remain unchanged, despite the rise.

However, the majority of deals offered are for short terms such as 2 or 5 year fixed deal, so when they come to an end, the increase in repayments could become a shock to some.

Will interest rates continue to rise?

The general feeling that there will likely be at least another 0.25% rise next year, with possibly even a second, which will take the Bank of England base rate to 1%

If interest rates continue to rise, what happens to monthly repayments

If as anticipated, there are a further two 0.25% rises, it will add on average £67 to a mortgage of the value of £175K. Although it is still not an enormous hike, it will undoubtedly affect some households worse than others. If the base rate continues to rise and hits the 3% mark, the cost then of additional repayments will go up more considerably to around £260 per month which hits the borrower far harder.

How will it affect house prices?

Whenever there is an increase in interest rates, it undoubtedly knocks the confidence in the property market, although it can’t be determined yet how much of an impact this may have. According to Nationwide’s latest report, house prices increased by 0.4% in October, despite the fact most buyers who know an interest rate rise was in the pipeline and to happen imminently. According to Ashley Osborne, head of UK residential at Colliers International said: “We’re not expecting any significant impact on property prices. For months now buyers have been pricing in an expectation that rates will rise, and people are fixing their mortgages for longer than in the past.”

How will my buy-to-let mortgage be affected?

As the majority of buy-to-let mortgage are interest only, the rate rise will have a worse impact on landlords.  their monthly repayments will see an additional £40 repayment per month compared with £25 increase on a repayment mortgage based on a 0.25% rise on a £200K interest only buy-to-let mortgage deal.

Savings rates – will these finally improve?

While the majority of banks will raise their mortgage rates with immediate effect, the rise to savings rates normally comes later. A number of lenders have already agreed to pass on the 0.25% to their savers. Nationwide issued a statement saying that the majority of savers holding accounts with them, would see improvements. Newcastle building society added it will pass on the rate rise in full to all its savers. But bear in mind that banks are generally not chasing after savers’ cash (they are still benefiting from government and Bank of England schemes to fund them) which means that most savers will continue to struggle to earn any more than 1% interest on a standard bank Isa.

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