As a mortgage adviser, a great proportion of my advice is around pricing and products. “what is the rate on a 5 year fixed?” “how does a tracker product work, and would you recommend it” – these are all questions which are prominent. The UK population is very focused on pricing, and rightfully so. Some clients have an element of loyalty to their banks, and therefore, pricing is not on their priority list. Others, however, are driven purely by pricing, and they will seek a mortgage from the lender with a competitive rate.
As a result, a lot of clients will find themselves considering different lenders, as banks had already started to increase their own rates, in anticipation of an increase in the bank of England base rate. Lenders do not necessarily have a proportional change in their rates, for example, Halifax, recently increased their residential fixed rate products by 0.2% – the BoE base rate has moved 0.25%.
So – how much does an increase of 0.25% to the Bank of England Base Rate bringing this to 0.5% (correct as at Nov 17) mean in terms of interest costs to our clients on a Base Rate Tracker Mortgage? On borrowings of £100,000, we are looking at an increase of interest costs over the course of a year – at £20.83 per month. On a capital and interest payment mortgage, that figure falls as you are actively paying down your balance monthly.
The increase in base rate, however, will affect a smaller proportion of the mortgagees in the UK (at least in the short term), as approximately 57% of UK mortgages are on a fixed product (source). For those clients on a fixed rate, the effect of the rise will only be felt once their fixed term comes to an end, and the lender reverts them to the standard variable rate. There is still a small chance that some borrowers will noticeably feel the pinch – whereby they may have to make contingency plans to deal with the increased costs – however this is deemed to be a dwindling number of households, given the new regulations asking that lenders give greater consideration to a client’s ability to deal with increased rates. Therefore, the recent entrants to the mortgage market, or recent remortgagees, are facing stricter guidelines on their affordability. The knock-on effect may be felt in other areas of the economy (retail for example), as clients have less disposable income given more is spent on their mortgage.
As an advisor, I had anticipated a base rate rise from 0.25% to 0.5% by the end of 2017, which we have now experienced. From here, I believe we will then see a levelling off for a couple of years. Lest we forget that the base rate was at 0.5% for nearly a decade after the 2007-2008 crash, before falling to an unimaginable level in August of 2016. Back when the rate was 0.5%, prior to August 2016, clients were embracing the low cost of finance, and no complaints were heard – on the back of this, client’s expectations will need to be re-adjusted to accept that the rates have gone up, but there are still some good deals out there.
For those of us who are savers, an increase in the base rate may mean an increase in the savings interest your bank is providing you with, so it’s not all doom and gloom.
To conclude, as I suspected, we have now seen the base rate rise to 0.5%, but fear not, as mortgage finance is still cheap, on a historic basis. Seek advice from your advisor, and don’t let mortgage finance drive your entire house-buying/remortgaging process. There are other factors to consider, such as early repayment charges, and adjoining fees (valuation, arrangement, booking fees) when deciding on any product.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE