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There's a lot of uncertainty around whether the Bank of England will increase base rate in the near future, with some economists calling for a rise to curb inflation, while others don't think it'll happen until 2019. Whether it happens sooner or later, borrowers are understandably concerned about the impact it would have on their monthly repayments, but happily, our research shows that they needn't panic.
The figures show that an interest rate rise will have a minimal effect on the mortgage rates being charged, as even if it rises by 0.75% and standard variable rates (SVRs) followed suit, typical repayments wouldn't be impacted to any extent.
The chart below highlights this in more detail. Based on a mortgage of £150,000 on a repayment basis over a 25-year term, a rise in SVR from the current average of 4.60% to a potential average of 4.85% would only see repayments rise by £17.06 a month, and that's always assuming the borrower doesn't opt for a fixed rate mortgage deal, which typically have far lower remortgage rates.
"A key member of the Bank of England has suggested that the time has come to start considering a 'modest' base rate rise to curb the effects of rising inflation," said Charlotte Nelson, finance expert at moneyfacts.co.uk, "the thought of which will be causing some borrowers to panic, particularly those who have become accustomed to low mortgage rates and repayments.
"However, as the chart illustrates, a small increase of 0.25% will have a relatively small impact on interest repayments. It shows that even those sitting on the average SVR of 4.60% will only see an increase of just £17 in the first instance.
"This will of course be dependent on where a borrower is in their mortgage journey, with those closer to being mortgage-free likely to see even less of an effect on a 0.25% increase, as they will have already repaid a significant proportion back to the lender."
Some may also be wondering whether providers will pass on any increase to base rate, particularly given that they didn't pass on the full cut last year. Our data shows that when base rate was cut on 4 August 2016, the average two-year variable tracker rate stood at 2.14%, while on 1 September it stood just 0.20% lower at 1.94%, showing that the reduction was not fully passed on.
Unfortunately, it may not work the other way around, as Charlotte explains: "When base rate does eventually rise, it is likely lenders will pass the full force of the rise on to borrowers. As the pressure on banks to put up interest rates for savings customers in this scenario will be intense, it is unlikely that providers will be able to absorb these costs and keep mortgage rates at their current record lows.
"While a base rate rise might seem distant now, borrowers should take the time to assess their situation and ensure they have a buffer in place if they are on a variable rate deal so they can cope with an increase to their rate, or opt for a fixed rate deal to secure their monthly repayments before it may be too late."
Whether a rate rise happens soon or not, it makes sense to be prepared and ensure you're in the best situation possible. This could well mean opting for a fixed rate mortgage – this can ensure your repayments will stay exactly the same no matter what happens to base rate during the term of your mortgage, giving you repayment certainty and helping you effectively budget for the long term. Use our mortgage calculator to get stared and see if you can find the right deal for you.
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