February 23, 2023
If you’ve been watching the news recently, you’ll have seen high-profile stories on interest rates rising in the UK. UK mortgage rates began rising rapidly in 2022 and have continued to increase in 2023.
We can’t (and won’t) attempt to predict the future or offer financial advice, but in this article, we explore how higher mortgage rates will impact you in 2023 and beyond.
Why are mortgage rates increasing?
Mortgage rates in the UK are directly related to the Bank of England’s base rate of interest rate. When that rate increases, so do mortgages.
Banks, building societies, and other mortgage lenders use the Bank of England base rate to calculate mortgage rates. Over the last decade, the interest rate has been low. However, recent economic shocks, including the war in Ukraine, have increased inflation. In an attempt to slow the rate of inflation to 2%, the Bank of England has increased the rate.
Today, the Bank of England base rate is 4%.
When the interest rate increases, it costs mortgage lenders more to borrow money. Therefore, any increase in the interest rate will mean higher borrowing costs.
But mortgage rates are higher than 4%. That’s because mortgage lenders use the Bank of England base rate to set their own mortgage rates. However, they don’t just charge 4%; they add a percentage on top to cover their fees and enable them to make a profit. This is listed on their website as their standard variable rate (SVR). This is around 6-7% at the moment – and could rise again.
Will my mortgage rate increase?
It depends on the type of mortgage you have.
If you have a fixed-rate mortgage deal, you won’t see an immediate increase in your payments. This is because your mortgage rate won’t change for the duration of your agreement, typically between 2-10 years.
Those on tracker mortgages (often known as a standard variable rate mortgage) will already be paying more for their homes. Any change to interest rates (and mortgage rates) is directly applied to these loans. The higher the interest rate, the higher the cost of repayments.
While interest rates may fall from current highs, it’s unlikely they’ll fall as low as 0.5% again, which means if you have a mortgage, you’ll be paying more.
It’s not just mortgage rates that are rising. You’ll see that the interest rate rise impacts all borrowing, including credit cards, overdrafts and loans. More positively, you should see an increase in the returns you receive on savings.
What happens when my fixed-rate deal ends?
When your fixed-rate deal ends, you’ll need to remortgage. You can do this either with the same provider or a new one. Unfortunately, whichever option you choose, your mortgage payments will likely increase – in some cases by a substantial amount.
If you’re lucky enough to have locked into a long-term deal (5-10 years), you have nothing to worry about now. Of course, we can’t predict the future, but most experts believe that, after peaking, the interest rate will begin to fall in the coming years. How can we tell? Because long-term fixed-rate deals are available at lower interest rates, which sends a clear signal, they believe rates will come down.
Those who must remortgage because their deals are ending have two choices. They can arrange and agree on a new deal for a fixed period or let the deal lapse and transition to a variable-rate mortgage.
How much will my mortgage increase?
Your monthly mortgage payment will depend on a range of factors, including the size of your mortgage, credit score, and individual circumstances.
The team at Money Helper have created a mortgage calculator which you can use to calculate your expected monthly repayments. The information should only be used as a guide but can give you a reliable ballpark and help you budget.
What happens if I can’t afford my new repayments?
Unfortunately, many people will need help to repay higher mortgages. If this happens to you, then speak to your lender. They may be able to offer support in several ways, including:
- Working with you to agree to temporary payment arrangements
- Extending the term of your mortgage
- Switching to interest-only repayments for a short period
If you can’t pay your mortgage, it’s important to ask for help.
Can I get a new mortgage?
Interest rate raises mean higher repayments. This, in turn, will impact on affordability calculations that lenders will undertake when assessing your mortgage application.
The result is that you may not be able to borrow as much as you would like, or previously have been able to. However, if you already have a mortgage with a provider, they can work with you to explore options to keep you in your home.
You may need to reconsider your plans if you want to buy a new property or borrow more.
However, we’re seeing property prices fall across the UK in response to rising rates. Quite how this will affect your property purchase depends on your circumstances, but overall, property prices are slowly falling.
What will happen with mortgage rates in the future?
This is a critical question and one we have no firm answer for. If inflation has peaked and begins to fall, we could see rates drop quickly. However, there could be other unexpected shocks to the economy (or the world) which may cause rates to remain high or go even higher.
Official predictions from the Bank of England Monetary Policy Committee suggest interest rates could reach as high as 4.5% by 2024. This suggests they will stay high for at least the next few years. However, signals from the mortgage market are that they expect rates to fall in the medium- to long term.
So, should you secure your deal for such a long time? It depends on your financial circumstances, predictions of the future, and plans.
Our advice: speak to an expert
This article provides information on the impact of rate rises on mortgage repayments generally, but you should always gain professional financial advice before making any decisions.
Brokers are ideally placed to help analyse your circumstances and provide expert advice and support to help you get a new mortgage offer. At Simon Blyth, we work with a range of brokers that can help you to secure the finance you need for any type of property, including domestic and commercial properties. Learn more here.