Expected interest rate hike in UK could hit five million home owners
Home owners with variable rate mortgages in the UK could end up paying out almost £83 million in December alone, or £990million over a year, if the Bank of England raises its base interest rate next week as widely expected.
The Bank’s Monetary Policy Committee meets on Thursday 02 May and it is almost certain that it will announce that interest rates will rise for the first time in a decade from the historic low of 0.25% to 0.5%.
Research from online mortgage broker Trussle shows that as there are five million mortgage borrowers on a variable rate in the UK then those who have not changed to a fixed rate face paying out an extra £82.8 million.
It says that home owners in London will be hit hardest, with the average variable rate borrower facing a £30.50 hike in monthly repayments or £336 annually.
The broker explained that most UK lenders will pass the full increase onto their customers within a month, based on historical lender behaviour. In this scenario, the average variable rate borrower on a repayment loan would see their monthly payment rise by £16.56, that’s £82.8million across the UK. On an annual basis, these borrowers will see their mortgage payments increase by £198, or £990million across the UK.
While most new home loans are on fixed rate terms, there are five million UK borrowers on variable rate products, which move up and down with the base interest rate set by the Bank of England.
A borrower may be on a variable rate because they opted for one when securing their mortgage; a tracker rate, for example, is likely to have been extremely favourable over the last decade. They may also be on a variable rate because their initial fixed rate has lapsed onto their lender’s Standard Variable Rate (SVR). Three million people are currently in this position, mostly because they haven’t switched at the right time.
Those on a variable rate in London, where the average outstanding mortgage value is around £243,000 will be hit hardest by a rate rise. A London based borrower with 20 years left on their mortgage, currently paying an interest rate of 2.25%, would see annual charges increase by £336.
The last time the base interest rate was changed was down by 0.25% in August 2016 and of the lenders monitored in Trussle’s 2016 lender league table some 53% had dropped their rates in line with the Bank of England within a month of the rate change, including four of the six biggest lenders.
Indeed, it points out that in anticipation of a rate rise more than 20 lenders have already raised their rates, several by a full 0.25%.
‘It’s looking ever more likely that the Bank of England will raise interest rates, either in November or December. This will impact anyone on a variable rate mortgage. While the increase is only likely to be small at first, borrowers on variable rate deals should consider how they’ll cover the extra cost, especially those on a tight budget or with a large outstanding mortgage,’ said Ishaan Malhi, Trussle chief executive officer.
‘With more rate rises potentially on the horizon, those nearing or beyond the end of their initial mortgage term should be thinking about switching to a more competitive deal. Because of the perceived complexity of getting a new mortgage, many people tend to this put this task off,’ he explained.
‘As a result, a quarter of mortgage borrowers in the UK have ended up on their lender’s standard variable rate, paying far too much interest. The process of switching has never been easier than it is now, so we urge borrowers to take action sooner rather than later,’ he added.
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