On August 2nd, the Bank of England voted to raise the base interest rate from 0.5% to 0.75%. The rise was the second in less than a year, but was widely anticipated, and was passed by the BoE unanimously.
When property owners and prospective property owners hear news of interest rate rises, their minds’ immediately turn to their mortgage. Property owners have enjoyed years of low interest rates since the financial crisis of 2007/8; in August 2017, the base rate was just 0.25%. So while the latest rise may seem mild and manageable for mortgage holders, it is actually rather substantial when compared with the financial picture of just a year ago.
Will the rate rise impact mortgages?
Yes, in most cases.
• The vast majority of property owners with standard variable rate mortgages, one of the most common types of mortgage will feel the impact of the rise. However, this will not happen automatically; the individual banks will need to decide whether to apply to rate rise to their customers.
• Property owners with “tracker” mortgages will definitely experience the rate rise, as their mortgage is inherently linked to the base rate. Banks will not need to announce that they are raising the rate for this kind of mortgage product; it will happen automatically.
• People with “fixed rate” mortgages will not experience the rise. As the name suggests, these mortgages are fixed to a specific rate for the length of the mortgage term.
Will banks pass the rate rise on to Standard Variable Rate customers?
It seems likely. The interest rate directly impacts the amount of interest charged on money that institutions lend and borrow between them. Most banks will usually pass the rate rise on to customers rather than managing the higher cost of borrowing for themselves. While this may seem unfair, it is worth noting that banks tend to cut their mortgage rates when interest rates fall, so the process works both ways.
A number of banks, including market leaders such as HSBC and First Direct, have already announced that they will be applying the rise to mortgage customers. More are expected to follow in the coming weeks.
What does this mean for the property market?
Essentially, it’s not great news. New and existing mortgages are now more expensive, which will directly impact the finances of UK buyers. The housing market outside of London has done fairly well in 2018, but interest rate rises are rarely good news for homeowners.
However, it is worth noting that the low interest rates that became commonplace over the last decade are actually incredibly unusual. Prior to the financial crash, interest rates were around 4% – compared to this, 0.75% is still relatively mild. As a result, the impact is more likely to be individual; impacting the decisions of a select number of buyers, rather than influencing overall trends in the industry.
While interest rate rises are always a point of contention, it can be assumed that this small rise is unlikely to be overly problematic. However, the BoE have indicated rises will continue, albeit gradually, in the years to come. As a result, mortgage holders may wish to consider their options regarding re-mortgaging now, while the rate is still relatively low.
Dave Beard is the founder of personal finance website Lending Expert and second charge mortgage specialist Feasible.co.uk. The company works with providers, lenders and brokers and compares a wide range of products including loans, mortgages, credit cards, investments and insurance products. Use the comparison tools on their website to search and compare hundreds of products online or speak with one their expert advisors for no obligation advice.