Last week, the Bank of England, England’s central bank based in Threadneedle Street London, announced that they would once again be raising the base rate for the 11th time in a row. A strategy that the bank’s monetary policy committee have been deploying in an attempt to curb inflation. Increasing the base rate discourages spending and therefore should bring inflationary pressure down. Until recently it looked like this tactic was working well and inflation was slowly coming down, however recent released data saw a small increase in inflation, so the bank had to act. Now, the question on homeowners lips is “What will happen to mortgage rates now?” and for many, “What will happen to tracker mortgages?”.
Base Rate And Fixed Rate Mortgages
There is a lot of debate about who will be hit hardest by mortgage rate increases, with come arguing fixed rate borrowers will be much worse off. For anyone who isn’t entirely clear on how rates correlate with the Bank of England’s base rate, here is a quick breakdown of how it works. The Bank of England’s base rate is the minimum rate of interest that the bank charges for borrowing money. Other banks, lenders, businesses etc then charge their own rate on top of this so that they can make a profit. If the base rate increases, usually the cost of things goods go up.
When it comes to mortgages, lenders choose how much interest they charge on their loans based on the base rate. When we saw a hike in interest rates at the end of 2022, lenders were reacting (or overreacting) to the base rate rise. Fixed rate mortgages allow borrowers to fix in their current rate for a number of years, meaning that they are somewhat protected from rate increases over that time period. E.g. a borrower could secure a rate of 3% for 5-years. During that period, the average mortgage rate could go up to 5% but they will be able to enjoy the fixed 3% rate until their 5-year period runs out.
Lenders will also offer tracker mortgages as well as fixed rate mortgages. These mortgages literally track the interest rate of the Bank of England and will go up or down depending on what the monetary policy committee decides. So, if we take the recent rate rise as an example, people on tracker mortgages went from an interest rate of 4% to a rate of 4.25% because the bank raised the base rate by 0.25%.
Will Fixed Rate Mortgages Come Off Worse?
The important thing to know is that despite the base rate rising last week, it looks like most lenders rates are either staying the same or in fact coming down. This means a couple of things potentially in our mind. Firstly, as we have been saying for a long time now, lenders initially overreacted a few months ago and massively inflated their interest rates unnecessarily. Now that the dust has settled and they are more well prepared, lenders are realising that their rates don’t need to be so high and raising them to 6, 7, 8% has probably had a negative impact on their business. Despite the base rate rising, they know that they can still make a profit so they are keeping rates the same or bringing them down to encourage back the business.
Secondly, I believe that the lenders probably understand that this rate increase will most likely be the last one and rates will probably come down after this. So, they are prepared for rates to fall and see no need to increase their products. All good news right? But why are some people news outlets like The Telegraph reporting that fixed rate mortgage customers are going to be hit the hardest? Well it’s because they are thinking ahead to when these borrowers come off their fixed rate period. Imagine this. You have a mortgage of £250,000 for 25 years. Your mortgage rate was secured 5-years ago at a rate of 2%. You enjoy comfortable payments of £1,060 a month for 5-years. However, when your fixed period comes to an end this year, you have two options. Come off the fixed rate and land on the lender’s pre-determined standard variable rate or speak to a mortgage advisor and switch to a new rate.
The lender’s standard variable rate is currently 5% and the lowest rate for your loan size that your mortgage advisor can find for you is currently 4.5%. That means that either way, your mortgage payments per month will go up to between £1,390 or £1,461 or between £3,960 to £4,812 extra per year. If and when rates come down, you can of course speak to your advisor about switching rates and products to bring the costs down, but it is an undeniable truth that fixed rate borrowers coming off their product will see their monthly costs go up.
How Will Rate Rises Impact Tracker Mortgages?
For people on tracker rate mortgages, their monthly payments will go up. That is clear. However, it is likely that these types of borrowers won’t be too shocked by the payments and in coming months they could possibly see rate reductions or some sort of rate stability as inflation hopefully gets under control. Let’s look at the latest base rate increase again. For someone tracking the base rate with their mortgage, they have been paying a rate of 3% or more since the end of 2022. In the latest rate increase, these borrowers went from paying 4% to 4.25%. Using the same mortgage figures as before, they went from paying £1,320 per month to £1,354. Not a huge increase at all really and less than a lot of fixed rate borrowers will find themselves paying. They are likely to either keep paying this rate for a while or, if the base rate comes down, they could end up paying less per month.
There is still some stigma around tracker rate mortgages it seems, as previously high base rate levels have left tracker mortgages extremely unaffordable for example in 1992 when the base rate was at 7.88% and more recently in 2007 when it was 5.75%. However, perhaps in this current climate, a tracker rate may end up being more beneficial for you. If you are concerned about interest rates, the best thing to do is speak to a professional mortgage advisor about your options. They will be able to talk you through everything in detail and help you to find the most beneficial route forward. Give our team of qualified and specialist mortgage professionals at Oportfolio Mortgages a call today for a free initial mortgage consultation.