Everything you need to know about how a 1.25% base rate may affect your mortgage

woman sitting with laptop, papers everywhere, and a catIn December 2021, the Bank of England (BoE) raised the base rate from a historically low 0.1% to 0.25%.

Since then, there have been four further base rate increases, bringing the base rate to 1.25% as of June 2022 – the highest it has been since 2009. So, for 13 years, borrowers have enjoyed relatively low interest rates, perhaps enabling them to borrow more when securing a mortgage, for example.

These five successive increases have been implemented in an attempt to slow the UK’s rate of inflation, which as of May 2022, stood at 9.1%.

If you already have a mortgage, or you are considering applying for one this year, you could feel concerned about how a 1.25% base rate will affect this loan.

Read on to find out how your mortgage might be affected by the rising base rate.

Your current mortgage repayments may increase as a result of the rising base rate

Depending on the kind of mortgage you have, your repayments might have already increased as a result of the base rate rises.

If you have a fixed-rate mortgage, your payments won’t have changed. However, if you are coming to the end of your fixed-rate period and are looking to remortgage in the near future, your future repayments could be more expensive than your current fixed rate.

On the other hand, if you have a tracker-rate mortgage, your repayments will fluctuate in line with the BoE’s base rate changes. So, you will have seen your payments increase since December 2021, as the BoE has slowly increased the base rate from the historically low 0.1%.

For example, according to the Guardian, the 841,000 borrowers on a tracker-rate mortgage would see an average increase of £25.22 a month when the base rate rises by 0.25%.

Finally, if you have a variable-rate mortgage, the interest you pay is applied at your lender’s discretion. Your lender might choose to pass the base rate increase onto borrowers, but this is not guaranteed.

For example, according to UK Finance researched published by the Guardian, a £200,000 standard variable-rate mortgage will cost an average of £504 more a year after an 0.25% base rate rise.

2 ways your mortgage application could be affected by the 1.25% base rate

If you are applying for a mortgage this year, keeping the increased base rate in mind could be constructive.

Here are two ways your mortgage application could be affected by the rising base rate.

  1. You will need to budget for higher interest on your repayments

If you had bought a home last year, when the base rate stood at 0.1%, you may have been able to borrow more than you can today. That’s because lenders will be assessing the affordability of your loan based on higher rates and higher repayments.

Simply put, when applying for a mortgage in a time of rising interest rates, it is important to budget not just for the cost of your home, but for a higher interest rate too.

  1. Once secured, your repayments could increase further in future

It could be constructive to consider how the base rate might increase in future. Indeed, with UK inflation at 9.1%, it is likely that the BoE may opt to increase the base rate further.

One way to mitigate these concerns could be to apply for a fixed-rate mortgage. By securing a loan at a fixed rate, you can count on your bills remaining steady for an agreed-upon term. So, if the BoE raises the base rate again, your repayments won’t be affected.

Get in touch

If your mortgage has already been affected by the base rate increase, you aren’t alone. Contact us for professional guidance on budgeting for interest rate increases on your current or future mortgage.

Email [email protected] or call 0131 339 2281 to speak to us.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home.

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