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A base rate rise happening next week is becoming an increasingly expected possibility, but what would it mean for your mortgage repayments? While fixed rate borrowers won't see an instant impact – it's only when they remortgage that they'll feel the effects of higher rates –variable rate borrowers could be hit within the month, potentially shelling out a collective £82.8m more as a result.
That's according to analysis from online mortgage broker Trussle, based on the finding that there are currently some 5 million variable rate borrowers in the UK. Some of those borrowers could have tracker-style mortgage products by choice, where rates are based on the movement of base rate, and could have likely been benefitting from highly favourable terms over the last decade.
However, other borrowers – an estimated 3 million – could be on a variable rate deal simply because their fixed rate mortgage term lapsed and they were transferred onto their lender's standard variable rate (SVR). This already means that they'll be spending far more on repayments, with our own data showing that the average SVR currently stands at 4.60%, compared with the average two-year fixed mortgage rate of 2.20%.
Either way, variable rate borrowers are likely to be hit with a clear rise in repayments if base rate rises by 0.25% on 2 November, as is widely expected. Most lenders would pass the full increase onto their customers within a month, based on historical behaviour, and our recent research shows that more than 20 lenders have already raised their rates in anticipation of a rate rise – several by a full 0.25% – so some borrowers could already be feeling the effects.
But just how much extra could they have to pay? Well, Trussle's calculations show that the average variable rate borrower – those with a typical repayment mortgage balance of £132,015 and 20 years left on the loan, currently paying a rate of 2.25% – would see their monthly payments rise by £16.56 if their mortgage rate rose by 0.25%, adding up to £82.8m across the UK in December alone, based on the 5 million borrowers who currently have a variable rate deal.
On an annual basis, these borrowers will see their mortgage payments increase by £198, or £990m across the UK. And this is only based on the typical variable rate borrower, too; someone with a larger mortgage could end up paying even more (a borrower with a £250,000 loan could see their repayments rise by £31 a month or £369 a year), as could someone on their lender's SVR, as if the average rises to 4.85%, their repayments will rise significantly.
This is why variable rate borrowers need to start preparing now for any potential rise to base rate, making sure they can comfortably afford to absorb the extra costs – and they may want to consider switching to a fixed rate mortgage for repayment certainty, particularly those on an SVR who are already paying far more than they need to be.
"It's looking ever more likely that the Bank of England will raise interest rates, either in November or December," said Ishaan Malhi, CEO and founder of Trussle. "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.
"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 put this task off. 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."
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