In a recent post, we discussed the potential impact of a base rate increase and how it might affect homeowners and savers.
As many of you may already be aware, last week The Bank of England did indeed raise the base rate from 0.25% to 0.5%.
Whilst this rise has been too small to get many Brits excited, it does make the first fire in borrowing costs for more than 10 years.
What everyone really wants to know is; how will it affect me on a day-to-day basis?
Will the base rate go up again any time soon?
Despite the rather uneventful 0.25% increase last week, many experts are predicting that we’ll see a further one or two increases in 2018. There is also talks of a ‘normalisation of rates’. This would involve taking the rates back up to 3% or more following the most abnormally low rates of the last decade.
Will my mortgage increase?
The simple answer is yes, it will. The average mortgage value in Britain is £175,000, those borrowing this amount will likely see their bill increase by around £22 per month as a result of the rise in interest rates.
If we do see another one or two increases next year, repayments will continue to march up. A normalisation of the base rate at 3% could see the average borrower being charged an additional £250 per month on top of their current bill.
What if my mortgage is fixed?
This depends on how long your deal is fixed for. Many opt for short 2-year fixes, after which time you will most likely see an increase in your payments.
For most, re-mortgaging once your fixed rate tariff ends will be your best bet. Failing to do so, could see you hit with a ‘payment shock’ when you get switched to your lender’s standard variable tariff.
Will this affect house prices?
Yes, it will more than likely affect house prices. Any time the base rate rises, it knocks confidence in the market. New buyers may hold off for a few more years until there is more certainty whilst investors may look to cut their losses in anticipation of a crash.
Subsequently, the demand for houses decreases which forces prices to fall.
Is this finally some good news for savers?
It’s been a long decade for savers who have watched their hard-earned savings stagnate. So surely this rate increase can only be good news for the long-term savers? Not so fast, whilst mortgage rates react immediately to any base rate changes, savings rates tend to take a little longer.
It’s important to remember that Banks are still profiting from the Bank of England’s funding for lending scheme. Thus, they are still not that interested in chasing saver’s cash. So, whilst most savers will likely see their rates improve over the next 12 months, they’ll still struggle to earn more than 1% on most standard ISAs.
Whilst this rise in base rate is relatively small and insignificant, it is likely to affect most Brits in one way or another. Further increases in 2018 are something to keep an eye on, but don’t be surprised to see this happen in the latter parts of the year, if at all.