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What a rise in interest rates could mean for your mortgage

Your home may be repossessed if you do not keep up repayments on your mortgage

The importance of interest rates

With many mortgages, interest rates determine the cost to you of your mortgage. With mortgages that aren’t on a fixed rate, generally, the higher the Bank of England base rate the higher the rate you’ll be charged for your mortgage.

It’s amazing how many people aren’t aware of the effect on their mortgage payments of even a 1% change in interest rates. Interest rates are set by the Bank of England Monetary Policy Committee (opens in a new window) each month. Their aim is to ensure their inflation targets are met. They can keep rates the same, raise them or lower them depending on what key economic indicators tell them.

How much will a 1% rise cost?

If we base this on a £150,000 mortgage taken over a 25-year term, then a 1% rise would cost around £80 per month – an additional £960 per year.

The table below shows you how payments would change as interest rates change on the example we have provided.

The repayment figures (as of 13.03.15) for the various rates are detailed below.

Your mortgage interest rate % Monthly payment (Repayment mortgage)
2.5% £673.12
3.0% £711.56
3.5% £751.23
4.0% £792.10
4.5% £834.15
5.0% £877.33
5.5% £921.64
6.0% £967.04
6.5% £1,013.45
7.0% £1,060.88
7.5% £1,109.27

(These figures are based on a standard mortgage and the basic mortgage costs, with no additional items added to the mortgage.)[1]

Different types of mortgage have different features

There are fixed-rate mortgages, variable rate mortgages, offset mortgages and tracker mortgages. Each of them has features that can work for you. A fixed-rate mortgage will let you know exactly how much you’re paying each month for the period it’s fixed for. An offset mortgage allows you to combine your current account, your savings account and your mortgage account. This could make your mortgage far more cost effective and tax efficient. With a variable rate mortgage you may benefit from other features, like better overpayment flexibility.

The best way to find the best mortgage for your circumstances is to read as much as you can and talk to experts.

The current situation

Homeowners in the UK have enjoyed low interest rates for a number of years now. Some experts are predicting that rates could start to rise again in late 2015 / early 2016.[2] No one really knows what will happen, but it can really help for you to know what changes in the rate mean for your mortgage payments. Everyone wants to get the best house they possibly can. But overstretching yourself can lead to problems in the future. As the old saying goes – fail to prepare, prepare to fail.

If interest rates increase

Mortgage holders may face higher repayments, so make sure you’re aware of the costs and that you can still afford your mortgage. Make sure you have the best deal available to you. And try not to let a deal expire. Always plan what you're going to do next before your current deal runs out. If interest rates are forecast to stay high for a long period it could benefit you to get a fixed-rate mortgage.

If interest rates decrease

When interest rates fall the price of other investments can rise. People see investing in property as an asset so generally house prices rise.[3] Prices also tend to rise because mortgages are, comparatively, cheaper. However, the value of a home can also decrease in value. Review your mortgage and make sure you’re getting the best deal. It can sometimes pay dividends to change the type of mortgage you have.

In the longer term

Higher interest rates mean, generally, that the property market slows down and the rise in house prices is slower.[4] This can be both a positive and a negative thing. You probably won’t get as much if you’re trying to sell your house. But if you’re looking for a bigger property then it should be proportionately less expensive.

Interest rates will change during the life of a mortgage. So it’s important to know how changes will affect your repayments. Plan ahead and you’ll be prepared for whatever happens to the base rate during your mortgage term.

Sources:
  1. The repayment figures (as of 13.03.15).
  2. This is MONEY, May 2015 (opens in a new window)
  3. Monevator, August 2013 (opens in a new window)
  4. INTERNATIONAL BUSINESS TIMES, November 2014 (opens in a new window)

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