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There's been a lot of speculation recently that a base rate rise could happen in the not-too-distant future, and while most economists believe that this won't happen at next week's Monetary Policy Committee (MPC) meeting, it's still on the cards over the coming months. But just what would happen to your mortgage if base rate rises?
Borrowers have been enjoying record low mortgage rates for years, so any increase could understandably come as a shock to the system – and could even lead to financial difficulties, as repayments would inevitably rise in response.
Base rate currently remains at its record low of 0.25%, and next week will mark the one-year anniversary of it being cut to this level. However, it can't stay that way forever, and there are expectations that it could rise to 0.50% and even 0.75% in the coming months. This could have a notable impact on household finances, as when base rate rises, mortgage rates tend to follow.
There's no guarantee that all providers will pass on the rate rise, but some borrowers will undoubtedly be impacted – particularly those sitting on a base rate tracker deal, since their mortgage rate will rise by default. Those on their lender's standard variable rate (SVR) may not be instantly impacted, as it'll be up to the provider to decide whether or not to pass on any rise in base rate, but some surely will.
Those with a fixed rate mortgage will have some respite, but even this won't last forever, as even fixed rates could edge up over time. Rachel Springall, finance expert at moneyfacts.co.uk, explains:
"Borrowers on a fixed rate mortgage over the longer term can breathe a sigh of relief, as their repayments will initially remain unchanged if base rate were to rise. However, at some point they will come off their deal, and may well need to stump up more cash on their repayments if rates have risen by that stage."
Essentially, any rise to base rate would eventually feed through to mortgage rates, which would mean that borrowers have to pay out more in monthly repayments. This could, in turn, reduce their disposable income, something that's already being eaten into by rising costs. "As inflation rises, the rising costs of daily goods may well already be impacting those families who are 'just about managing'," said Rachel, "so any increase in the cost of their mortgage will be terrible."
But how much could those mortgage payments rise by?
Let's say you had a £150,000 mortgage on a 25-year term on a repayment basis. With an average two-year mortgage rate of 2.26%, your monthly repayments would currently be £654.94. However, if base rate rose by 0.50% (to 0.75%) and mortgage rates followed suit, a two-year mortgage at 2.76% would result in monthly repayments of £692.73.
This equates to an extra £37.79 per month, which may not sound like a lot initially, but would add up to £453.48 in the first year alone – and if you had a larger mortgage or higher interest rate, your repayments could rise even more.
"Just a slight rise to the Bank of England base rate could really hit consumer finances hard and it's not something they would see coming, considering the low interest rate environment today," said Rachel. "This is why mortgage customers would be wise to take advantage of the top deals on offer today for some reassurance."
This is the only sensible thing to do if you're worried about rates rising – if you switch to a fixed rate mortgage now, you can avoid being impacted by any base rate rise for years to come, as your rate, and therefore repayments, will be set in stone.
Mortgage rates are still at record lows, too, so now's the perfect time to take the plunge, and if you opt for a longer-term deal (these days three, five and even 10-year mortgage deals are commonplace) you can have up to a decade of repayment security. Use our mortgage calculator or check out our Best Buys to get started, and see if you can base rate-proof your mortgage for years to come.
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