How do rising interest rates impact homeowners and first-time buyers?

Since the financial crisis of 2008, the Bank of England has kept its base rate low, meaning that borrowing has been cheap for banks, and cheap for homeowners.  As a result, many current homeowners will have enjoyed more than 10 years of low interest rates. There has been a gradual creep of the base rate from its historic low of 0.1% during the pandemic, to 0.5% at the beginning of the year, and now after the seventh increase since December 2021 to its current level is 2.25%.

The government sets the Bank of England an inflation target of 2%. This helps everyone plan for the future. If inflation is too high it is hard for companies to set the right prices and for people to manage their finances.  Recently inflation has hit 10%, causing the Bank of England to increase the Base Rate to its current level of 2.25%, and many are predicting a rise to 3% or 4% next year. This is an attempt by the Bank of England to bring inflation back under control and stop prices from continuing to increase.

Image of pound coins on a graph showing interest rates

By raising interest rates, borrowing becomes more expensive, which in theory puts people off borrowing and encourages them to save instead. With less demand for goods and services, prices should fall and inflation should go down.

Due to this sharp rise, the mortgage landscape is changing. For those with a tracker mortgage, this rate rise will have already started to affect their monthly payments, as rate increases are passed on.

Discounted variable rate mortgages will also be affected, though, these are linked to the providers standard variable rate and can change more slowly.

For those on a fixed rate mortgage, payments will remain the same until the end of the agreed fixed period.

If you’re a Homeowner with a fixed rate deal ending in the next three to six months reviewing your mortgage now is a good idea and you may look to lock into a new rate now, or at least get an offer on the table so you have options when your current deal comes to an end.

Typically mortgage offers are valid for 6 months so being proactive and reviewing your mortgage could save you money, especially if interest rates continue to rise into next year.

As a first-time buyer, the most important factor is ensuring that your financial situation is appropriate to the mortgage product chosen. With interest rates increasing it’s also very important you’re comfortable with the mortgage monthly payments and your likely living costs.

One way to look at higher mortgage rates as a first-time buyer is to compare the cost of renting with buying. Although it may seem that now might not be the ideal time to take the plunge as a first-time buyer, lenders are working hard to provide incentives to new borrowers. Our excellent relationship with providers means we can analyse the whole of market to find something that works for you.

If this has got you thinking or worried, we’re here to help.   Get in touch and we’ll talk you through your options.  Or sign up to our monthly newsletter, to keep your finger on the pulse.

Undray Griffith – 13th May 2022