Crushing news – the Bank of England has increased the rate for the first time in the last decade. Let’s figure out what will it cost for mortgage holders and savers.
In October, the possibility of raising rates was mentioned by Gertjan Vlej, a member of the Bank of England committee, in his speech at the economic forum in London. He also outlined the main reasons and prerequisites for raising rates.
What does it mean raising rates for homeowners?
It is expected that an increase in the rates of the Bank of England will lead to an increase in monthly payments for millions of people with variable and necessary standards for mortgage loans.
When there is an increase in rates, this will be the first time that the cost of borrowing has increased in a decade. For most people, it will be the first increase in monthly housing allowances in their lives.
Only holders of mortgages with a fixed interest rate will be protected from the rate increase. Naturally, this will continue only until the end of the term of their current transaction.
How significant will the increase be?
The cost of raising interest rates will vary from each house in different ways depending on the conditions of the mortgage. The primary factor will be the length of mortgage payments, although this factor is not the only one.
According to the financial data provider Moneyfacts, the average standard interest rate on mortgages (SVR) in the UK is 4.6%. Let’s look at an example if someone has an outstanding mortgage balance of £ 200,000 with an obligation to pay them in 25 years. In this case, this person will have to pay £ 28.72 a month more than before. That is, the total amount of payment will no longer be 1 123.05, but 1 151.77 pounds sterling. Thus, the rate will increase by 0.25%, provided that it is at the stage of repayment.
It may happen that an increase of 0.25% may soon lead to a series increase of 1%. In this case, holders of mortgages with a non-fixed rate will be forced to pay more for 117.10 euros per month or more than 1400 pounds sterling per year!
What do the holders of the mortgage?
If your mortgage can change its value over time, you need to worry about the availability of an additional or passive source of income to cope with rising prices. It is also worth thinking about changing the mortgage conditions with a fixed rate. If a fixed rate for a mortgage is higher at the moment, in the long term it can turn out to be a very favorable offer for you.
For example, the building society of Yorkshire has a two-year fixed calculation, the value of which is 0.99% until the end of November 2019. And it works for those who borrow not more than 60% of the cost of their property.
Such transactions help to understand why the number of people who are reorganizing has turned out to be the highest since 2009.
How will things stand with the depositors?
Investors suffer from very low-interest rates, and millions of people will be rewarded with news of probable growth.
It so happened that the number of debtors exceeds the number of creditors in an approximate ratio of 7: 1.
Now, on average, the depositor pays 0.4%. Two years ago this figure was 0.66%, and even earlier – 1%.
Last month, it turned out that Isa’s savings accounts collapsed in popularity, and the amount of £ 20 billion was paid in 12 months. In part, the decline is partly due to the continued low-interest rates.
However, in the world of savings, not everything turned out to be so bad. The influx of bank applicants, such as Atom Bank and Wyelands Bank, led to intense competition in the fixed-interest bond market. There are 5-year-old bonds on the market that pay 2.5% or more. This is 10 times higher than the current base rate of the Bank of England.
Rise in the mortgage rate in the UK will significantly affect depositors and holders of mortgages. In this situation, a fixed rate on a mortgage can be a solution. Nevertheless, it is not the only way out. Each case has its advantages and disadvantages. A correct decision requires thorough analysis and economic calculations.