Interest rates held for now - but mortgage borrowers can still save thousands by switching

6 June 2018

Despite widespread expectations of an interest rate rise this year, the Monetary Policy Committee (MPC) voted to keep rates at 0.5% in May – the latest meeting at the time of writing.

In the weeks before the MPC’s meeting, economic forecaster the EY Item Club predicted two interest rate hikes in 2018 in its spring forecast: a 0.25% hike in May, followed by a further 0.25% increase near the end of the year.

Financial provider Hargreaves Lansdown was taking a similar view.

Its senior economist Ben Brettell says: “It looked like a May rate rise was a near-certainty. The Bank of England had upgraded its growth forecasts, and in March two members of the MPC broke ranks and voted for an immediate rate rise. Markets were then pricing in a 90% chance of a rate rise at May’s policy meeting.”

However, following disappointing first-quarter growth figures of just 0.1% and ongoing Brexit uncertainty, by the week of the MPC meeting the chances of a rise had slipped to just 8% and the committee voted seven to two in favour of holding interest rates.

“Personally, I think we might not see a rate rise for the rest of the year,” Mr Brettell adds.

The news will be welcome relief to borrowers on standard variable rate (SVR) mortgages, as it means their monthly repayments are not expected to rise in the near future. However, not all experts agree and, if recent events have proved anything, the outlook for interest rates can change quickly. This stalling may only provide temporary reprieve.

Aniket Bhaduri, senior investment consultant at JLT Employee Benefits, says: “The country’s long-term productivity problems remain, and unemployment continues to be at a record low. Scaling back a rate rise expectation may fuel inflation through a weaker pound and cheaper credit, with a continued increase in commodity prices. We therefore expect a hike later this year.”

The only way variable rate borrowers can be confident that their mortgage repayments will not rise is to remortgage to a fixed-rate mortgage. Terms can typically be fixed for two to five years, often longer, making it easier for homeowners to budget.

Peace of mind aside, it can also be a fantastic way of reducing outgoings if you are on your lender’s SVR or haven’t remortgaged in some time.

Figures from broker London & Country Mortgages show that a borrower with a £150,000 mortgage over 25 years would be paying £855.18 a month on a lender’s typical SVR of 4.75%. However, by switching to a two-year fixed rate of 1.34% with Monmouthshire Building Society (available to 65% LTV with a £999 fee and free legals and valuation), monthly repayments would fall to £588.69, saving the homeowner £266.49 a month – or a whopping £6,395.76 over the two-year period.

David Hollingworth, associate director of communications at London & Country Mortgages, says: “Keeping on top of the mortgage rate is a good way to manage costs now and to protect against any potential future increases too.”

He adds: “It makes sense to start shopping around several months before the end of the current deal so that everything can be lined up in good time for a smooth switch. Some lender offers can be valid for up to six months, so it’s possible to start the process even earlier in some cases.”

According to research from online mortgage broker Habito, 40% of UK homeowners have neither switched nor reviewed their mortgage in the past five years.

Remortgaging: How the savings stack up

Loan: £150,000 over 25 years
Current deal: Lender’s typical SVR of 4.75%
Current monthly repayments: £855.18 a month
New deal: 1.34% two-year fixed rate for remortgagers with Monmouthshire Building Society (£999 arrangement fee but includes free legals and valuation)
New monthly repayments: £588.69

Savings: £266.49 a month, £6,395.76 over two-year term of mortgage

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