Please note that this is an opinion piece and is purely hypothetical, exploring what could happen. Not what will necessarily happen.
This week, several economists suggested that we could see a 6% base rate from the Bank of England within the next 12 months. Despite there being no real indication that this will be categorically be the case and despite inflation coming down, albeit slower than most of us are hoping for. The base rate from the Bank of England directly impacts the cost of borrowing and purchasing in the UK.
Over the last 6 months or so the base rate has risen significantly to try and combat rising inflation and an economic crisis in the UK. That has meant that mortgage interest rates have also been increasing at a rapid pace. They slowed down in around March and April 2023 however it has been recently announced that although inflation is dropping, it is still not anywhere near the 2% target that the bank of England is hoping for. That revelation has encouraged lenders to increase their rates even more, despite it not being completely necessary to do so. Now meaning that the average mortgage rate is creeping closer and closer to 6%.
What Could Happen To Mortgages If a 6% Base Rate Is Announced?
Currently the Bank of England base rate is still below 5% and in June 2023 many people expect this to go up again, hopefully for the last time. However some economists have suggested that the base rate could end up peaking at 6% or more. Something that would not be good for UK consumers. If the base rate reached 6% this could force lenders to push their rates up significantly so that lending money still made sense.
For fixed term mortgage products, this means that rates could go up significantly. Currently rates are at around 5.5% meaning that lenders are adding a minimum of 1% interest on top of the base rate. If the base rate reaches 6% lenders will start charging rates of at least 7% but most likely closer to 7.5% or even 8% so that they can still make a profit and as a means of ensuring that they only lend to borrowers who can afford it.
For variable rate products or tracker rate products, this means that rates wills till go up but could come down sooner than fixed rate owners. Variable rates or tracker rate mortgages follow the bank of England’s base rate with a small interest premium added by the lender. So, if the base rate goes up to 6%, a tracker mortgage might work out to 6% base rate +0.35% interest from the lender, giving a payable rate of 6.35%. Much lower than the hypothetical fixed rates. The base rate is not likely to go higher than 6%, so that means that when it goes down again, tracker rate owners will benefit from a lower rate almost immediately.
6% Base Rate Mortgage Examples
Using the above figures for fixed rate mortgages and tracker mortgages, let’s look at some figures to see how a 6% base rate could impact mortgage payments if lenders react negatively to another base rate increase. Lets take an average property price of £280,000 with a 20% deposit (80% LTV mortgage) giving a mortgage amount of £224,000 over 25 years.
- With a current average mortgage rate of 5.5% this mortgage would cost £1,376 per month.
- If the base rate went up to 6%, an average fixed rate mortgage could be 7.5%. This would cost £1,655 a month. A £279 per month difference or a £3,348 extra a year payment.
- For tracker rate product borrowers, assuming that the current tracker is BOEBR +0.35% would pay 4.85% at £1,290 per month.
- If the base rate goes up to 6%, assuming that the tracker product is BOEBR +0.35%, a borrower would pay 6.35% at £1,492 per month. An extra £202 a month or an extra £2,424 per year. However, as discussed, this could go down quickly as the base rate is not likely to get higher than 6%.
What Can I Do About Rising Mortgage Interest Rates?
Navigating the mortgage interest rates is tricky at the moment, and the worst thing you can do is go it alone. You must speak to a mortgage advisor in order to stand any chance of getting a manageable and competitive mortgage interest rate. At Oportfolio mortgages we have access to over 90 different mortgage lenders and thousands of different mortgage products. Our job is to help you choose the most manageable and most competitive product for your own situation. Call our team today to see how we can help you. Your initial mortgage consultation with us is completely free of charge, so why not give us a quick call?