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What if UK Interest Rates Go Up?

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UK interest rates currently sit at 1.75%. Rate hikes in December 2021 and February, March, May, June and August 2022 mean the bank rate is now at its highest for 13 years.

Although the rate is still historically low, a whole generation of homeowners won’t have experienced rates this high, or rising rates at all.

Experts predict that the base rate could hit 3% sometime next year. So, what does that mean for your mortgage?

Should you remortgage now and fix them at a cheap-ish rate before they all disappear? Let’s take a look.

The base rate and your mortgage

If you’re on a fixed-rate mortgage, you’ll be protected from interest rate rises until your fixed rate ends.

But if you’re on a variable rate mortgage, such as your lender’s standard variable rate (SVR) or a tracker, your pay rate and therefore your payments will go up each time the Bank of England raises the base rate.

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Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.

Fixed rates are rising

Most people switch to another fixed-rate mortgage when their existing fixed rate ends. But fixed rates are rising and are likely to go up further.

The average two-year fixed-rate mortgage is 3.74%, a rise of 1.4% since December. Five-year fixes average 3.89%, up 1.25% since December.

If the base rate rises to 3% as predicted, fixed-rate mortgages could rise to 4.5% – 5.5%, or more.

Early repayment charges

The problem with fixed-rate mortgages is that they usually come with early repayment charges (ERCs). This is a fee you’ll need to pay if you want to get out of the mortgage during the fixed term – to remortgage to a cheaper deal, for example.

ERCs don’t normally get charged on a variable-rate mortgage. So, if you’re on a variable rate you can normally remortgage to a fixed rate without paying to exit your current deal.

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Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.

Should I lock in my mortgage rate?

If you’re on a fixed rate mortgage, you won’t be affected by the recent rate rises until the end of your fixed term. 

But you might be tempted to get out of your contract now and remortgage to another fixed rate before rates rise further and all the relatively cheap deals disappear from the market.

But before you do this you should work out how much it will cost in ERCs.

ERCs are usually charged on a sliding scale. They might be 5% of your outstanding balance if you cancel your mortgage in the first year, but this often falls to 1% or so in the final year.

Is it worth paying ERCs?

If you are thinking of exiting a fixed deal to get another fixed mortgage, you need to do the sums.

For example, if you had one year left on your £200,000 mortgage and the ERCs were 1% of your mortgage, it would cost you £2,000 to exit the deal.

Say you found a five-year fix at 3.89%. Assuming a repayment term of 20 years, you’d pay £1,200 a month. Over five years you’d pay £72,000. If you add on the ERC of £2,000, you’d pay £74,000 over five years.

Alternatively, you might want to wait and see how things look in a year’s time when you could switch deals fee-free. By that time, you might only be able to get a five-year fix at 5.5%. This would cost you £1,376 a month or £82,560 over five years.

This means you’d have been better off paying the £2,000 to exit your fixed rate.

Talk to a broker

Mortgages can get complicated – getting expert mortgage advice from a broker is worth it.

A broker can work out how much specific deals will cost you over a set amount of time. They can calculate how much you could save by switching deals now versus how much you’ll need to pay in ERCs to make the switch.

You can usually reserve a new mortgage offer three to six months before your current deal ends and you need the new mortgage to start. This means you could potentially lock in a rate now and see how things stand in six months’ time regarding rates. If rates have stayed low, you don’t have to go ahead with the remortgage.

You will normally pay an arrangement fee to reserve a new mortgage, but you could view this as a fee for hedging your bets.

Our preferred mortgage advisers have saved an average of £339 a month for customers looking to remortgage.

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Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.

Last Updated: August 9th, 2022

Phil Spencer

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