The BOE (Bank of England) has made a decision to increase interest rates to 0.75%. This is the 2nd time in 10 years the BOE is raising rates. The 0.25 percentage increase will affect savings mortgage as well as property prices. If you care to know the exact implications, continue reading below.
The direct impact of the hike (on an individual level) will be minimal for most people. The people who stand to be more affected are those with variable mortgages whose total cost tends to fluctuate based on base rate changes. Individuals with large mortgages on fixed rates won’t be affected.
What if you are servicing a variable rate mortgage loan, how much more should you expect to pay?
Your variable mortgage loan (which matches fluctuations in the base rate) should match the interest rate increase, i.e., add an extra 0.25% to the overall cost of your mortgage. To have a clearer picture of the increase, the 0.25% increase adds an additional £12 expense on a £100,000 mortgage loan or £25 on a £200,000 loan.
The monthly bill for Nationwide’s 400,000 households on the base mortgage rate will increase to £461 from £449, for mortgage loans worth £100,000 and £922 from £897 for mortgage loans worth £200,000.
Uplift on savings account?
Most banks are reluctant to raise savings rates but swift when raising mortgage rates. For this reason, it can take a while before savings account holders can start enjoying increased interest payouts. Currently, the average interest rate offered on easy access accounts with the most notable high street providers stands at 0.23% only. Most savers are likely to enjoy a slight increase to 0.3 or 0.4 percent as banks capitalize on the rate hike to boost net interest margin and overall profits.
Should we expect more rate hikes in the future?
Possibly, although the sentiments of BOE governor suggest the next rate hike may not happen until 2019. Experts don’t expect interest rates to go back to the 5% range experienced before the financial crisis. Most believe base rates won’t surpass the 2-3% range which is still unlikely in the near future.
With that said UK households are set to feel intense financial pressure with the ordinary citizen being forced to spend more than their earnings, take up debt or deplete their savings. If the BOE raises interest rates further by another 1.5%, the cost of mortgage loans for Nationwide’s main clientele (individuals who take £200,000 mortgage loans) will increase to £1,055 monthly. This represents a £158 increase from what they are paying currently.
If such an increase happens, it would result in a significant personal budget shortfall for many families. This is precisely why the BOE isn’t likely to follow the interest rate hike path if such a path can be avoided.
Is it advisable to fix your mortgage to avoid extra costs in case of future interest rate hikes?
The number of people taking fixed mortgages currently has risen sharly. This new development in the mortgage market has seen the number of 10-year fixed mortgages increase yet they are marginally above the 2 to 5-year fixes taken by most households.
Mortgage lenders like HSBC, for instance, have begun allowing mortgage lenders to lock their interest rates for a decade at 2.49% only. Coventry Building Society is granting a similar interest rate lock at 2.39%. The current interest rate environment signalling other hikes is making longer-term fixes more popular in 2018.
Impact on the property market
The property market in the South and London are experiencing a depression. Markets in the north and Midlands are more active. The same should be expected although Brexit poses some uncertainty. When we consider stamp duty rises as well as higher taxes on buy-to-let property already impacting the capital market, the current hike is expected to have a small impact. To the rest of the economy, economists predict a 2 to 3% annualised price increase.
Impact on the pound?
The pound is likely to remain unchanged. The sterling has managed to stick around €1.12 even with the anticipation surrounding the hike. Unless there is a significant breakthrough on Brexit negotiations, the pound should remain unchanged.
In a nutshell, the current rate hike is likely to have a significant negative impact on large borrowers who pay variable rates. The hike will become a problem for everyone if it marks the beginning of a period characterised by consistent hikes in the near-term.
Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.