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Interest rate rise: what does it mean for homeowners, borrowers and savers?

·4-min read
 (Daniel Lynch)
(Daniel Lynch)

Mortgage borrowers whose deal directly tracks the base rate will see their payments increase by around £49 per month on average, adding up to nearly £600 annually, as a result of Thursday’s base rate hike.

The figures, from trade association UK Finance, also showed that a borrower sitting on their lender’s standard variable rate (SVR) will typically see a monthly increase of just under £31, adding up to around £370 per year.

‘Looming concern’ for those with fixed-rate mortgages

Nearly four-fifths (77 per cent) of residential mortgages outstanding are fixed rates, meaning these borrowers will not see the immediate impact of the Bank of England’s base rate hike on Thursday from 1.75 per cent to 2.25 per cent – the highest level since November 2008.

But, if they have been safely locked into their home loan for a while, they may find they get a bill shock when they do eventually re-mortgage.

Tim Bannister, Rightmove’s housing expert, said: “Although the majority of people are on fixed-rate mortgages, there’s a looming concern for those with their terms due to end over the next six months or so as interest rates continue to creep up.

“It’s likely that those who choose to fix again will find that rates have doubled in some cases since they last locked in, and so despite paying down some of their debt they could find their new monthly mortgage payments are higher, even if they’ve moved into a lower LTV (loan-to-value) bracket and have built up equity.

“They will now face the tough decision of moving to a tracker mortgage in the hope that interest rates drop again soon, or taking another fixed deal for a bit more certainty on their outgoings.”

First-time buyers

The latest hike could also make it more of a struggle for first-time buyers to get on the property ladder, adding to the rising cost of raising a deposit.

According to property website Rightmove, first-time buyers typically face scraping together £22,409 if they want to raise a 10 per cent deposit on a home, up from £14,135 10 years ago.

There has been speculation this week that a stamp duty cut may be on the cards, although some commentators have suggested this could push house prices up further.

Nathan Emerson, CEO of estate and letting agents’ body Propertymark, said: “Recent rises have been so widely spoken about that this has fed directly into consumer sentiment and has left some people uneasy about moving home, but those looking to enter the market should not be spooked by this.

“Despite increases, the majority of buyers and sellers are taking advantage of the cooling-off in house prices and the slight easing in competition, and they continue to enter a strong and healthy market.”

What does the rate rise mean for debt and savings?

Those with other types of debts will also feel the strain of rising rates.

Alice Haine, personal finance analyst at Bestinvest said: “Consumers borrowed an additional £1.4 billion in credit in July, a further jump on the increase of £1.8 billion in June – with half of that sum on credit cards alone – highlighting just how difficult the current environment has become.

“Anyone with an existing fixed-rate personal loan or car loan does not need to panic yet as the terms of their loan have already been agreed, but new borrowers shopping around for credit may find the cost of debt higher.

“Anyone with a small credit card balance they are struggling to clear should consider switching to a 0 per cent balance transfer deal to buy themselves some breathing space.

“This gives them an interest-free period to pay back the debt at their own pace without the fear of the debt compounding out of control.”

While banks and building societies are quick to apply higher rates to debt, they can be a little slower to deliver the good news to savers

Alice Haine, Bestinvest

Savers meanwhile may see some improvements to deals in the coming weeks.

But Ms Haine said that with high inflation, “the real return on any cash sitting in a savings account will be deeply negative – no matter how great the headline rate is”.

She added: “With the best easy access accounts climbing to 1.95 per cent this week and the best fixed-term accounts hitting 3.82 per cent, every penny in additional interest will be crucial in the fight against high inflation, which eats away at our spending power.

“But it might be worth waiting a little while to let the latest interest rate rises trickle through from lenders to savers.

“While banks and building societies are quick to apply higher rates to debt, they can be a little slower to deliver the good news to savers.”