Interest rate rise: borrowers facing higher mortgage bills urged to fix

Published by Hannah Nemeth on 02 August 2018.
Last updated on 02 August 2018


Households that are still on standard variable rate mortgages (SVRs) are being urged by brokers to consider switching.

Many borrowers have planned ahead and fixed their mortgages so the impact of today’s Bank of England rate rise from 0.5% to 0.75% won’t affect them straight away.

Paul Broadhead, head of mortgage and housing policy at the Building Societies Association (BSA), says: “The majority of mortgage borrowers will see no immediate impact on their household finances as two-thirds of existing mortgages are on fixed rates.”

The BSA points out that a 0.25% increase on a £100,000 repayment mortgage works out at just £13 more a month and that 66% of all outstanding mortgage balances are on fixed rates.

However, mortgage brokers are urging those on standard variable rates (SVR) to think about switching to a fixed-rate to help cut their monthly mortgage bill.

David Hollingworth, mortgage expert at L&C Mortgages adds: “Although many borrowers do appear to have looked ahead and have sought to fix their mortgage rate, those who have failed to do anything so far may finally be triggered to revisit their situation.

“Although rates have been drifting upwards since the run-up to the last rate hike, the fixed-rate options are still very competitive. Those most vulnerable to rising rates will be borrowers on their lender’s SVR.

“An increase of 0.25% for a £200,000, 25-year repayment mortgage could increase monthly payments by around £25 or more. Reviewing their rate could offer them substantial cost savings as well as being able to lock their rate down and protect any further rate rises.”

Daniel Hegarty, chief executive of digital mortgage broker Habito, agrees: “The best way to protect against rising rates is to see if you could be getting a better deal on a fixed-rate mortgage. This will keep your repayments the same for two, three, five or more years so that any future rate changes won’t catch you off-guard.

“We've seen a large increase in popularity of mid- to long-term fixes in recent months. The number of homeowners asking for three-year fixed-term mortgages has doubled, while requests for five-year, fixed-rate mortgages has grown by a third. Ten-year fixed rate deals remain more niche, however. At the last base rate rise in November 2017 we saw a quadrupling of applications from homeowners wanting to lock in their monthly payments until 2027.”

More 10-year fixes predicted

Shaun Church, director at mortgage broker Private Finance, also predicts that there will be more of an appetite for longer fixes.

“It’s likely that longer-term fixed rate products will grow in popularity as borrowers seek financial stability,” he says. “Ten-year fixed mortgages provide a decade of immunity against rising rates and the average cost is relatively low at just 2.74%, compared to 1.73% for a two-year fix.

“However, they often come with early repayment charges if borrowers switch their mortgage deal before 10 years is up. Lenders should therefore offer greater flexibility if they wish to capitalise on the move towards long-term products.”

Bad news for first-time buyers

Gemma Harle, managing director of Intrinsic mortgage network, part of wealth management firm Quilter, points out the impact of the 0.25% hike on people buying their first home. Ms Harle comments: “First-time buyers are likely to suffer the most due to the rise. Higher mortgage costs relative to their earnings will cause this group to be more stretched and have less cash month to month. 

“According to figures from UK Finance, the average age of a first-time buyer is now 30, has a gross household income of £42,000, and a loan to value of 85.0%. To make sure people still are able to get on the property ladder, there needs to be more innovation in the mortgage market aimed at specifically helping first-time buyers.”

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