Fri 11 Feb 2022
Paul Bennett, Director
Thursdays are big news in the world of personal finance. Once a month, the Bank of England’s Monetary Policy Committee meets to decide the fate of the country’s interest rate. The decision made by its nine members is widely publicised and keenly followed by those in the property market – by both professionals and homeowners.
If you are looking to take out a new mortgage, are coming to the end of your home loan’s fixed-rate period, are on a tracker mortgage or are thinking about remortgaging to finance your next property, you’ll know that the Bank of England (BoE) has raised the interest rate to 0.5%.
Although any rise sounds alarming, it’s worth putting the two recent rate rises into perspective. Here are 5 points that explain the wider picture, quelling any immediate sense of panic among borrowers in the process.
1. The interest rate and mortgages rates are not the same thing
It’s a common assumption that the BoE’s interest rate is the same as mortgage interest rates. The latter actually covers multiple rates of interest attached to individual home loans, and these figures are set by the lender, not the BoE.
Lenders have to pay to secure their funding and a cheaper money market will result in cheaper mortgage interest rates. While the BoE’s interest rate will have some effect on mortgage rates, lenders will pay far more attention to LIBOR and SWAP rates - the rates of interest banks charge to lend money to each other, and the rates at which lenders can acquire a fixed price for funding over a specific period of time, respectively.
It’s the combination of these three rates, plus other external factors, that will decide whether mortgage rates rise or fall. The upshot? Not all mortgage rates will increase every time the BoE’s interest rate does.
2. The majority of borrowers won’t notice any change in repayments
Recent data from UK Finance reveals that 74% of mortgage borrowers in the UK are currently on fixed-rate deals. As a result, borrowers with fixed-rate home loans won’t notice any change to their monthly repayments during their fixed term – even if the BoE makes further rate increases.
The good news is there are still a number of competitive 1, 2, 3, 5 and even 10-year fixed-rate mortgages in the current lending market. This allows buyers to lock in to a guaranteed monthly repayment that won’t change, whatever the BoE decides to do next.
3. Lenders need customers, whatever the interest rate
Banks and building societies don’t give money away – they are businesses who depend on customers. The home loan market has been very competitive in recent years and the race to secure business is what keeps mortgage rates in check.
Competition among banks and building societies is set to remain in 2022, therefore lenders won’t do anything too drastic that puts borrowers off. There’s even a forecast for new lenders and products to launch in 2022, which should result in some attractive products.
4. An interest rate rise may not be your biggest expense
While it’s only natural to be driven by a mortgage’s rate of interest, borrowers need to pay just as much attention to two ‘bookend’ aspects – the arrangement fee at the start and any early redemption fee at the end. Look out for arrangement fees that, when worked out monthly, amount to more than a small rise in mortgage rates – usually the lower the interest rate attached to the mortgage, the higher the arrangement fee.
In addition, weigh up how long you intend to stay in the property you are buying versus any fixed-rate you are tempted by. Sometimes it makes more financial sense to take out a short-term tracker or variable mortgage rather than be lumped with an extortionate early redemption penalty if you leave the mortgage before the fixed term ends.
5. We’re rising from rock bottom rates
The interest rate was at a historically low level for many months – compounded by the Covid pandemic – and most people knew this was an artificially low, unsustainable position. Even with the recent rate rises to 0.25% and then 0.50%, the BoE interest rate is very low and brokers forecast any future rises to be slow, steady and measured.
As of February 2022, many mortgage products are being offered with rates that are still below those seen in 2021 and retrospectively, borrowing now is still at an affordable level. This will remain so, even if the BoE interest rate nudges up towards 1% or even 2%.
As an example of affordability, UK Finance figures show that with the BoE’s new 0.5% interest rate has meant the monthly repayment on a typical tracker mortgage has gone up by £25.76. A typical borrower with a mortgage on a standard variable rate is now paying £15.96 more every month.
Behr & Butchoff always recommends borrowers seek the advice of a professional mortgage broker or financial adviser before they take out a mortgage. We’d be happy to share our recommendations with you, so get in touch.