Home owners have benefited from lower base rates
A quarter of home owners in the UK have benefited from lower base rates but now on the third anniversary since rates dropped to a record low of 0.5%, research indicates many are concerned about a rise.
Already one major mortgage lender, the Halifax, has announced it is increasing its standard variable mortgage rate from 3.5% to 3.99% in May despite the Bank of England rate remaining at 0.5%.
‘Over the last three years, some borrowers have benefited from the low interest rate environment with reduced monthly mortgage repayments. However, with the high cost of living, including bills, food and transport costs, many have been forced to use the extra cash from their reduced mortgage repayments to bridge the gap of their shortfalls for essential outgoings,’ said Clare Francis, mortgage spokesperson for MoneySupermarket which carried out the research.
The research also found a future base rate rise would have a real impact on home owners’ finances, with over a third, 35%, stating they would be worse off if it were to increase, and a further 26% stating they would have to make cutbacks to their day to day spending.
On the flip side, some felt they would benefit from a rate rise as they would get a better return on their savings. A base rate rise of just 0.5% would mean a £43 per month jump in mortgage payments for home owners with a £150,000 variable repayment mortgage, currently paying 4%. If the base rate is pushed up by 1% then their monthly repayments would leap by £85 a month.
‘Whilst base rate is not expected to rise in the immediate future, it is clear borrowers have got used to lower repayments and their finances could be severely impacted should there be any change to the rate.
‘And as the recent news that Halifax is hiking its SVR from May illustrates, some borrowers won’t necessarily have to wait for the base rate to rise before their mortgage payments start to climb again,’ warned Francis.
‘Anyone currently sitting on their lender’s SVR should therefore consider remortgaging now. With base rate expected to remain unchanged for the foreseeable future, some may be willing to stick with a variable rate deal. If this is the case, a tracker is a safer option than a discount because tracker mortgages are directly linked to base rate and changes will mirror the movement of base rate. Discounts on the other hand are linked to the lender’s SVR so there is a risk that the mortgage rate may go up even if base rate remains unchanged,’ she explained.
‘If you are worried about higher mortgage repayments, a fixed rate will give protection against future base rate increases. Five year fixes are popular at the moment. The risk of going for a shorter term fix is that the fixed period could end as interest rates are rising so you could find yourself having to remortgage when rates are higher than they are at the moment,’ she added.