How Will Rising Interest Rates Affect Your Mortgage Payments?
It’s the question many people are now asking us in our day to day to conversations, when will interest rates rise?
The bank of England base rate has remained at 0.5% since March 2009 and we have enjoyed 5 and a half years of record low rates. Mortgage rates have been historically low as a result and many of our clients have locked in to record low fixed rates from 2 years up to 5 years.
However, all good things must come to an end! The economy has now officially recovered and growth Domestic product output for the UK is now above pre-recession levels.
In the last Monetary Policy Committee meeting held on the 6th and 7th August, the MPC members (9 in total) voted to keep base rate at 0.5% for another month, however, unlike every month since March 2009, 2 of the 9 members voted for an increase of 0.25%. This is a clear sign that a rise is on the cards and as the economy continues to strengthen with falling unemployment and a growing housing market a rise must be around the corner, but when……?
It seems the only thing holding back another rise now are low wages and low inflation (below the government’s target of 2%). With regards to wages when the recession hit many employers opted to replace full time contracts with either short term or zero hour contracts. We have seen an increase in the number of clients that require a mortgage and who are on a zero hour contract. Some mortgage lenders will lend if you have a zero hours contract or a short term contract and we have the knowledge to know which lenders to place these clients with so that they are not disadvantaged from a mortgage perspective.
The experts are predicting a rate rise next year with some expecting a rise this year. Capital Economics publish their forecast on their website and are predicting a rate rise of up to 1% by the end of 2015.
Our in-house Bank Base Rate Forecast.
We expect a base rate rise next year. The office of National statistics confirmed the latest Gross Domestic Product figures (GDP) at 0.8% for the 2nd quarter of 2014 and this follows growth in the previous quarter and now puts the UK GDP above pre-recession levels. We expect the Bank of England base rate to rise after the election in May of next year. We also expect the Bank to increase rates only by 0.25% and to then monitor the increase for quarter of a year before increasing rates again by 0.25% leaving rates at 1% for the rest of 2015.
How will the rise affect your mortgage?
If you are risk-adverse then depending on your circumstances hopefully you have already fixed in to a 2, 3 or 5 years fixed rate. Fixed rates are still very low and there is still time to fix in. What will happen next is that the money markets will predict the increase in rates and will start to re-price upwards. We would suggest that anyone on a base rate tracker at 2.5% or above now would be best advised to refinance and fix in now whilst rates are low. A rate increase of 0.5% on a mortgage of £150,000 over 20 years would see the mortgage payments increase by £657 over the year.
The best 2 years fixed rate for a loan of £150,000 on a property value of £250,000 is around 1.99% with the lender meeting the property valuation and solicitor’s costs – Get it whilst it’s HOT!