In December 2021, the Bank of England’s Monetary Policy Committee voted by a large majority to increase interest rates for the first time in three years to combat soaring inflation and the rising cost of living.
Despite the emergence of the Omicron variant, new restrictions, talks of another possible lockdown and financial jitters around the world, the Bank decided to act to keep inflation under control, raising the base interest rate from 0.1% to 0.25%.
So, what does the rise mean for those looking to move?
Higher mortgage costs for some
Increases to the base interest rate has a mixed impact for those hoping to move house.
On the one hand, a higher interest rate means savers are better rewarded, allowing movers to build more funds towards a house deposit. On the other hand, borrowing becomes more expensive, so it costs more to secure a mortgage.
The increase from the historic low of 0.1% to 0.25% will mean those on variable rate mortgages – or those looking to secure this type of mortgage – will face higher costs.
Variable rate mortgages are typically tracker mortgages that track the base interest rate. So, if interest rates decrease, the cost of mortgage repayments will fall. But if rates rise, mortgage repayment costs will increase.
Those with a mortgage on their lender’s standard variable rate could also face higher costs, although this will be down to the lender’s discretion and whether they decide to pass on the rate increase to their customers.
Most borrowers, however, opt for fixed-rate mortgages because of the stability and security they provide.
For those on fixed-rate mortgages, the interest rate rise makes no difference in the short-term as a fixed rate has already been locked in. This has been an increasingly popular choice in recent years, with interest rates being so low for so long.
Since 2019, an astonishing 96% of new mortgages for owner-occupiers have been taken on fixed rates. This high uptake may reflect the uncertainty caused by Brexit, general elections, and the impact of the pandemic.
Overall, 74% (or three in four) of outstanding mortgages are fixed, and these mortgage holders benefit when interest rates increase – in that they see no immediate change to their costs.
Those looking to move early next year may be wondering whether it’s best to opt for a fixed-rate mortgage or a variable rate, with the potential for further interest rate rises in the future. Any future increases are expected to be small and incremental, but future borrowers may want to lock in lower rates now before any more changes in early 2022.
What impact will the rate rise have on the mortgage market?
According to the Financial Times, the UK mortgage market is heading for a surge in activity over the coming weeks. This comes as borrowers look to steal a march on any further rises in lenders’ interest rates in 2022.
Chris Sykes, associate director at mortgage broker Private Finance, told the Financial Times that the rate increase had provoked ‘a flood of queries about its effects from clients who have become accustomed to rock-bottom interest rates’. He also claimed it had administered a ‘kick up the rear’ to those considering re-mortgaging or first-time borrowing.
The Financial Times argued that, in the short term, the recent rate increase will add to mortgage bills for the 2.2 million people on variable rate deals. This includes standard variable rates as well as tracker mortgages.
Meanwhile, for those 850,000 UK borrowers on trackers, an increase of 0.15 percentage points would add an extra £180 to annual repayments on average, industry body UK Finance claimed.
Figures from UK Finance show that, overall, the rate rise will have a ‘limited’ impact on the mortgage market, with most mortgage borrowers unaffected.
John Philips, Just Mortgages national operations director, said: “Although it’s a slight surprise that it has happened this side of Christmas, an interest rate rise was inevitable.
“However, rates have only risen to 0.25% and the mortgage market shouldn’t be massively impacted in the short term.
“While rates on most products will rise, the amount repaid per month is unlikely to drastically increase to the point borrowers can no longer afford the mortgage.
“Competition between lenders will keep rates relatively low, and this is unlikely to curb the rampant demand for houses.”
Tomer Aboody, director at MT Finance, said:
“While this is a modest increase, the first of a few gradual raises over the next couple of years, it should help keep inflation in check, as well as dampen down the prospect of future house price increases.
“This is welcome, as the market has been frenzied over the past year.
“Banks and institutional mortgage lenders are still very much liquid which means competition on mortgage pricing will remain high.
“There may not be a plethora of sub-one percent rates, but they will still be affordable and on the relatively cheap side.”
For those looking to move this year, but are concerned by interest rate increases coming down the line, the safest option is to opt for a fixed-rate mortgage.
Any future rises will have little to no impact on their costs, providing extra peace of mind as the cost-of-living crisis bites in 2022.
A minority of people will remain tempted by variable rate mortgages – and this could work in their favour, if interest rates were to be slashed again to protect the economy – but what seems more likely is that interest rates will rise again, rather than fall. The direction of travel is now upwards in terms of interest rates, although further lockdown measures could change this.