Interest rate hike could add £687-a-year to mortgages - but charge can be avoided

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Analysts at Moneyfacts.co.uk calculated that should the Bank of England raise the base rate from 0.1 percent to 0.5 percent people could end up paying £57.25 extra a month – the equivalent of £687 annually. Should the rate rise to 0.25 percent, people will be stung by an extra £17.02 a month, meaning they end up shelling out £204.24 more than they would now over a year.

They based their assessment on a standard borrower with a 25-year £200,000 mortgage on a standard variable rate mortgage of 4.41 percent.

However, should borrowers switch to a fixed-rate mortgage many could end up saving, they said.

A borrower who changes their mortgage from the current average SVR to a two-year fixed rate mortgage at the average rate of 2.25 percent could see their payments reduce to approximately £872.26 per month.

This would reduce their mortgage outgoings in the region of £229.21 per month, or a whopping £2,750.52 annually.

© Getty Bank of England chief Andrew Bailey
© Getty Chancellor Rishi Sunak

The news emerged as there was rampant speculation that the Bank of England‘s Monetary Policy Committee could raise the rate from 0.1 percent to control increasing inflation.

It is rumoured that the bank could raise the rate to 0.25 percent next month before a further hike to 0.5 percent in March.

Commenting on the speculation, Eleanor Williams, from Moneyfacts, said: “As the possibility of a potential interest rate rise looms, borrowers who have a fixed rate mortgage would be protected from seeing their monthly repayments increase, as their rates are locked in for the initial term of their current deal.

“However, in contrast, those who are currently on a variable rate mortgage – such as a base-rate tracker, discounted-variable or their lender’s standard variable rate (SVR) – are likely to be the first who would feel the impact of any increase, as their monthly mortgage payments could well go up if lenders pass some, or all, of a base rate rise on to them.

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© Express Later life mortgages

“Rate competition has seen the month-on-month average fixed mortgage rates fall and various providers having launched attention-grabbing sub-1 percent mortgage rates of late, showing their ability to price low and compete for business while we remain in a low interest rate environment, which means this could be a good time for eligible borrowers to consider a new mortgage deal.

“The average SVR is currently 4.41 percent, almost double the average two-year fixed rate for all LTVs of 2.25 percent which they might be able to secure – which means some borrowers who lock into a new mortgage now might be able to not only reduce their outgoings in the region of £200 per month, but also protect themselves from any future rises in rates, giving them a stable monthly payment to budget to as we move forwards.”

Ms Williams spoke shortly after leading independent economist Julian Jessop said it has become “increasingly likely” that interest rates could skyrocket up to five fold “very soon”.

Do you think the bank should raise interest rates? Click here and tell us your thoughts below.

© Parliament TV Independent economist Julian Jessop

He claimed the Bank of England’s Monetary Policy Committee could hike its base rate from the current record low of 0.1 percent to as much as 0.5 percent.

However, the “Brexit optimist” academic warned people not to panic because this would still represent a lower rate than the 0.75 percent in place before the pandemic struck at the beginning of last year.

He tweeted: “(It) looks increasingly likely that the #BoE (Bank of England) will raise interest rates much sooner than most anticipated, but don’t panic…

“A hike from 0.1 per cent to 0.25 percent (or even 0.5 percent) would still leave nominal rates near historic lows (and still lower than the pre-Covid level of 0.75 percent).

“Context is important.

© Getty Bank of England chief Andrew Bailey

“The economic backdrop and fiscal choices will have a far bigger impact on the public finances than any likely changes in short-term rates.

“And higher inflation at least keeps real rates low.

“Credibility is important too.

“Other CBs (Central Banks) are already raising rates or reducing asset purchases.

“Some on the MPC (Monetary Policy Committee) may be happy just to let the current QE (quantitative easing) programme expire and not announce any more for 2022, but a small rate hike on top would send a stronger message.”

He later added: “Consumer confidence is down in part because of inflation fears. The Bank needs to respond to this.”

Quantitative easing is a practice where banks print money in an effort to stimulate economic growth. Its downside is that it can lead to inflation increasing.

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