Friday, August 5, 2022

What the Bank of England’s rate hike to 1.75% means for mortgages and savings

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While the rate hike could be bad news for homeowners, savers could see their returns increase

It has decided to make a 50 basis point jump to halt the rise in inflation as prices rise.

The Bank of England (BoE) has hiked interest rates to 1.75% from 1.25%, the highest level since December 2008.

Not only is it the first time since 1995 that there has been a 50 basis percent rise, the bank is now forecasting a 15-month recession.

It comes as consumers face rising energy, food and fuel costs and many are now struggling to afford basic necessities.

I takes a look at how the changes could affect you and your finances.

Up to this point, the increase in interest rates would have meant a relatively small increase in mortgage bills, but this increase will certainly start at a time when people’s budgets are already tight due to the cost-of-living crisis.

Millions of homeowners will see their mortgage costs rise thanks to Thursday’s rate hike — just over a fifth of all mortgage holders have an adjustable-rate business.

Of those with variable rates, about 800,000 have a tracker deal and the rest are stuck at their lender’s standard variable rate — the highest rate a lender will charge.

Quilter calculated that someone taking out a £250,000 mortgage over 25 years at around one per cent would pay around £942 a month.

After Thursday’s rise to 1.75 per cent, someone borrowing the same amount but at 1.75 per cent would pay £1,029 a month.

If interest rates continue to rise to 2.5 per cent, monthly payments would rise to £1,121, resulting in a difference of almost £180.

Consumers who do not have fixed deals, or those who do but see their plans ending soon, are encouraged to switch to one as soon as possible.

Karen Noye, Mortgage Specialist at Quilter, said: “Those who have fixed rate contracts may still feel protected by their contract. However, unless you’ve recently settled on a long, fixed-price contract, you’ll likely have to deal with the music sooner rather than later when your current contract expires.

“Over the next year, thousands of borrowers will be forced to move into a completely different interest rate environment and get a new deal.

“That means suddenly a slew of new borrowers are being forced to share in the misery that is being felt by those who are already struggling with tracker or standard mortgages.”

Fortunately, a higher interest rate is likely to have a positive impact on savings accounts as many banks expand their offerings.

Laura Suter, head of personal finance at AJ Bell, said: “We’ve already seen an interest rate war break out in the savings market and savers are finally being rewarded for the money they’ve stashed away.”

The best easy-to-access account is up from 0.71 per cent on the day the Bank of England first began raising interest rates in December to 1.8 per cent, meaning £10,000 in cash gets you £109 more Earn interest per year than you were late last year.

That means today’s rate hike will give savings rates another boost.

Ms Suter said: “With inflation at 9.4 per cent and expectations that it will hit 11 per cent in a couple of months, many savers will struggle to get excited about the rise in Best Buy savings rates since December , because the real value of their savings is still shrinking significantly in real terms.”

The higher yields won’t be good news for savers, however, as their money is still shrinking in real terms. Consumers are also warned against locking up their money for long periods of time.

“A word of caution applies to the fixed rate savings market, where we have faced stiff competition to get to the top of the best buy charts. If you lock in a fixed rate today, you’ll miss out on future rate hikes – the banks aren’t stupid, they’re trying to withdraw money now to make more profit if rates continue to rise.

“We still expect the bank to continue raising rates this year and well into next, which means that to freeze a fixed-rate savings account today means you miss out on any of those hikes.”

The rate hike could not only affect mortgage payments, but also house prices and the number of people who see their homes being confiscated.

Quilter’s analysis of the number of mortgage redemptions per year versus the Bank of England’s base rate shows that changes in interest rates can correlate with the number of redemptions that occur in a year.

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