Thursday 4 August 2022 05:01 PM UK recession explained: What mortgage interest rates rise means for my savings trends now

Thursday 4 August 2022 05:01 PM UK recession explained: What mortgage interest rates rise means for my savings trends now
Thursday 4 August 2022 05:01 PM UK recession explained: What mortgage interest rates rise means for my savings trends now

Thursday 4 August 2022 05:01 PM UK recession explained: What mortgage interest rates rise means for my savings trends now

The Bank of England has increased its base rate 0.5 percentage points to 1.75 per cent, the biggest interest rate hike in 27 years and its sixth rise since December 2021.

Its Monetary Policy Committee announced the move today, with eight members out of nine voting in favour of the hike. 

The five previous base rate increases since December 2021 each raised it by a smaller 0.25 percentage points, taking it from 0.1 per cent to 1.25 per cent, before the move today.

Today's 0.5 percentage point hike is the biggest jump since 1997 when responsibility for the base rate was handed from the Government to the Bank of England.

Rate rise: The Bank of England has increased the base rate of interest by 0.5% to reach 1.75%

Rate rise: The Bank of England has increased the base rate of interest by 0.5% to reach 1.75%

The aim is to get a grip on the soaring inflation which continues to drive up the price of everyday essentials such as food, fuel and energy bills.

But the move will increase the cost of new fixed-rate and existing variable rate mortgages. 

Experts have said that repayments on the typical mortgage have now increased by hundreds of pounds per year since the base rate rises began. 

Banks and building societies may choose to up their savings rates slightly due to the base rate increase, although since the base rate began rising in December 2021 most have failed to increase savings rates to a comparable level.

Why is the base rate going up?

The Bank of England has now increased the base rate six times since December 2021, going from 0.1 per cent to 1.75 per cent, in a bid to bring down inflation.

The base rate determines the interest rate the Bank of England pays to banks that hold money with it and influences the rates those banks charge people to borrow money or pay people to save.

By raising the base rate, it will hope to make borrowing more expensive and saving more lucrative for Britons.

This in theory should encourage people to spend less and save more and therefore help to push inflation down, by dampening the economy and the amount of money banks create in new loans.

Still rising: The Bank of England has said CPI inflation could reach 13% in the next few months

Still rising: The Bank of England has said CPI inflation could reach 13% in the next few months

At its simplest, inflation is the percentage increase in the cost of goods and services over the course of a year. 

The Bank of England said today Consumer Price Index (CPI) inflation was likely to hit 13 per cent in the next few months, blaming increases in the cost of energy.  

CPI is the measure against which the Government sets its inflation target, currently at 2 per cent.

Yesterday, think tank the National Institute of Economic and Social Research warned that the retail prices index, a separate measure of inflation, could hit 17.7 per cent by the end of the year.

RPI is no longer an official statistic but it is used to set rail fares, student loans repayments and some payments to the Government.

High inflation is a problem because it usually indicates that prices are rising at a faster level than people's incomes. It also makes it difficult for businesses to set those prices and for households to plan their spending.

What does it mean for mortgages?

The typical cost of a mortgage has been pushed up by successive base rate rises. 

During the pandemic house buying boom in 2020 and 2021, interest rates reached record lows with some deals priced at below 1 per cent - but now the cheapest fixed deals are charging more than 3 per cent.

According to fresh analysis by the financial information service Moneyfacts, the average two-year fixed mortgage rate is now 3.95 per cent. In August 2020, it was just 2.08 per cent. 

Similarly, the typical five-year fix has now surpassed the 4 per cent mark to reach 4.08 per cent - up from 2.34 per cent in August 2020. 

With the base rate having risen, these averages are set to increase further.  

Cecilia Mourain, managing director for homebuying at the finance app Moneybox said: 'Lenders will hike mortgage rates straight after a Bank of England rate rise, but we've seen that typically they will come down again, ever so slightly, in the following weeks as lenders continue to compete for business.'

However, how this rise affects borrowers depends on the type of mortgage they have.

On the rise: Average mortgage rates have been increasing since 2020

On the rise: Average mortgage rates have been increasing since 2020

For those not on fixed rates the Bank of England decision brings another increase, the third this year, and even those on fixed rates will face increased interest rates when their term ends.

Simon Gammon, managing partner of estate agent Knight Frank's finance arm, said: 'Mortgage rates are now changing on a daily basis and lenders are giving borrowers and brokers little notice about repricing.

'Some homeowners who are nearing the end of their terms are facing a shock when they come to refinance, because they are unable to borrow as much as they hoped, [and some of] those who are looking to buy are realising once-obtainable properties are now out of reach.'

According to Moneyfacts, the typical standard variable rate mortgage is now at 5.17% interest

According to Moneyfacts, the typical standard variable rate mortgage is now at 5.17% interest

Variable rates

Mortgage holders with a discount deal, or a base rate tracker mortgage will see their payments increase immediately.

As rates have fluctuated over the past year fewer borrowers are choosing variable rates, opting instead for fixed mortgages as a security against the rises.

Those on their lender's standard variable rate (SVR) will also likely see rates rises over the coming weeks. According to Moneyfacts, the typical SVR is now at a rate of 5.17 per cent. For someone with a £200,000 mortgage, a rise of 0.50 per cent would add approximately £1,400 onto total repayments over two years.

Rising repayments: These figures show how much monthly repayments could rise on a typical standard variable rate mortgage, if the rates were increased 0.5% in line with the base rate

Rising repayments: These figures show how much monthly repayments could rise on a typical standard variable rate mortgage, if the rates were increased 0.5% in line with the base rate

It is thought that around 12 per cent of mortgages are currently on a standard variable rate, according to UK Finance.

According to credit app TotallyMoney, someone with an average UK home costing £270,708 and a variable rate mortgage on a 25 per cent deposit faces paying £196 per month more than in November last year, once the 0.5 per cent hike is factored in.

Those on SVRs who are able to switch to a fixed product could save thousands by doing so. 

According to Rachel Springall, finance expert at Moneyfacts, the cost savings to switch from the typical SVR (5.17 per cent) to the typical two-year fix (3.95 per cent) is a difference of approximately £3,333 over two years, based on a £200,000 mortgage. 

Increases: The cost of owning a home is set to rise for some, as interest rates on new fixed-rate mortgages and existing variable rate ones will likely go up

Increases: The cost of owning a home is set to rise for some, as interest rates on new fixed-rate mortgages and existing variable rate ones will likely go up

Fixed rates

Fixed-rate mortgages are the most popular choice for homeowners in the UK, with around three quarters of residential borrowers opting for one.

Analysis by L&C Mortgages prior to the rise showed that the average of the keenest two-year fixed rate mortgages now stands at more than two per cent higher than it was at the beginning of the year.

Fixed-rate mortgages do not automatically track the base rate rise, but lenders will usually increase rates for new applicants to some degree.  

 While those on fixed rate deals will be sheltered from interest rate rises for the duration of their mortgage term, around half are expected to expire in the next two years

Those already on a fixed rate mortgage will not immediately feel the effect of the rise, as they are locked into their existing rate until the term ends.

However, the the rate hike will make it more expensive for those looking to remortgage. Around half of all fixed mortgage deals are set to expire in the next two years. 

Brian Murphy, head of lending at Mortgage Advice Bureau said: 'While those on fixed rate deals will be sheltered from interest rate rises for the duration of their mortgage term, around half are expected to expire in the next two years. 

'Some may therefore consider lengthening their mortgage terms or even overpay on their mortgage to help them with payments over the long term.'

You can browse rates and find the best mortgage deal for you using This is Money and broker L&C's tool. 

First-time buyers further squeezed 

First-time buyers may particularly struggle with the rate rises, as they typically earn less and have larger mortgages than people higher up the property ladder.

Rightmove has calculated that, with the 0.5 per cent rate hike, a first-time buyer with a £224,943 home on a 10 per cent deposit mortgage on a two-year fix would see monthly mortgage payments increase to an average of 40 per cent of their gross salary, a level not seen since 2012.

 With each jump in interest rates, homeowners are contributing approximately 1 per cent extra of their gross salary on average towards a mortgage

Tim Bannister, Rightmove 

Prior to today, it said the average monthly mortgage payment for a first-time buyer household was £976. This had already increased by 20 per cent since January 2022 when it was £813.

Given the rate rise this will now increase to an average of £1,030, taking it from 38 per cent to 40 per cent of the average gross salary - a level not seen since 2012.

A 10 per cent deposit on an average first-time buyer type home is now £22,494, which is 57 per cent higher than ten years ago (£14,316) and the average asking price of a first-time buyer home is at a record of £224,943.

Tim Bannister, Rightmove's housing expert, said: 'With each jump in interest rates, home-owners are contributing approximately 1 per cent extra of their gross salary on average towards a mortgage.

'Average mortgage rates for a two-year fix are just over 3 per cent compared to nearly 6 per cent ten years ago, so they are still historically low.

'However, as they creep upwards, the large number of first-time buyers looking to move this year may look for some financial certainty by locking in longer mortgage terms.'

Will it stop people moving home?

While the base

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