How might an interest rate rise affect your mortgage?

Interest rates

Interest rates play an important part in your life, whether you’re a saver, borrower or homeowner.

Whenever you borrow money, such as through a loan or credit card, you are usually charged interest. If you have savings then you can earn interest on the money you’ve put away.

That’s why news each month about the Bank of England (BofE) base interest rate is often eagerly awaited, as savers and borrowers see whether the rate has gone up or down. The Bank of England rate stood at a record low of 0.5% for more than seven years, before being decreased even further to 0.25% in August 2016. It’s since risen to 0.5%, as at November 2017.

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Good for some, not so good for others

If you have a mortgage, chances are that seeing interest rates remain largely static in recent times has been rather helpful. Low interest rates have meant that the mortgage market has been very competitive, and for many on a long-term low tracker rate it’s been quite beneficial.

However, if you have large savings and rely on the interest then it’s not been good news. The rates that your bank or building society offers you in return for holding your savings with them are affected by the BofE rate.

So if the base rate goes down, the savings rate you’re offered goes down as well. Savings accounts have performed pretty poorly as a result.

What could the impact of an interest rate rise be for my repayments?

First up, if you’re a saver, an interest rate rise is likely to be good news. As the BofE rate goes up, you can expect bank and building society rates to go up too.

However, for mortgage holders it could mean an increase in your interest rate and your monthly repayments (depending on the terms and conditions) – similarly, this could affect you if you have other loans and credit cards.

A significant number of homeowners will have never been faced with an interest rate rise.

Find out how an interest rate rise might affect your finances with our infographic. Click the image below:

Give yourselves enough time

Finding the right house may take a while and even after you’ve had an offer accepted, it’s quite normal for it to take around 12 weeks for the home to be officially yours, sometimes longer.

Time to get your finances in order

Check your credit report before you apply for a mortgage and allow plenty of time to manage and improve it, it could save you money and improve your chances of getting the mortgage deal you want.

What impact would an interest rate rise have on your ability to afford your repayments?

Following the rate rise from 0.25% to 0.5%, a person on a tracker mortgage who is paying 2 per cent interest on a 25-year, £250,000 repayment will see their monthly £1,060 instalment rise by around £30.

With that in mind, it's worth using our mortgage calculator to see how much a rate rise would actually stretch your finances before you decide what action to take.

Find out how much your mortgage or loan would go up with our handy new mortgage calculator.

If you have a fixed rate mortgage, you won’t be affected if the rates go up during your fixed period, but when the time comes to remortgage, your interest rate could jump up quite significantly – and with it, the amount of money you’d have to find each month.

Plan ahead and be prepared

You might consider overpaying while the lower rate lasts – or alternatively you could consider re-mortgaging and, particularly if you are a variable rate holder, securing a new fixed-rate deal before the base rate starts to shift.

Some say that at a time when many standard savings accounts are earning relatively poor returns, making overpayments on your mortgage could end up saving you interest in the long term. This could help provide a buffer against an eventual interest rate rise.

If you are a first-time buyer, this could be a crucial time to get yourself on the market - and securing a fixed rate could be ideal. Bear in mind, though, that your lender is likely to consider the chances of an imminent base rate rise when calculating your new fixed rate deal. Whichever you choose, plan ahead and be prepared.

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