Mortgage rates: Millions of homeowners warned of ‘real financial shock’ to come | Personal Finance | Finance
On Thursday, the Bank of England announced the fifth consecutive increase to interest rates taking it up to 1.25 percent from one percent, which is the highest seen since 2009. The move was done to try and curb inflation which is expected to reach 11 percent towards the end of the year. Homeowners who are on a Standard Variable Rate (SVR) or tracker mortgages will be hit the hardest by the latest interest rate increase. This is because these mortgages ‘track’ the Bank of England’s base rate and the monthly payments fluctuate with changing interest rates.
An analysis by the financial services company AJ Bell found that at the current average variable rate someone with £400,000 of borrowing will need to pay £624 extra each year.
If a person has borrowed £250,000 for their mortgage then they are going to have to find a further £384 a year and a £100,0000 mortgage will need an extra £156 a year.
The firm added that as 85 percent of all mortgages and 94 percent of new mortgages are on a fixed rate deal most people will be protected from the increase.
The firm stated that these people will only face the effect if they come to remortgage.
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Laura Suter, head of personal finance at AJ Bell, said: “The bigger shock will come when their deal is up and they remortgage – then they will face the full effect of all the recent interest rate hikes in one go.
“Someone who locked in record low mortgage rates in recent years would face a real financial shock if they came to refinance that debt today.”
Ms Suter added that the increase in the base rate from 0.1 percent in April last year to 1.2 percent will now mean that someone borrowing £100,000 could have an increase in payments of £648 extra a year, assuming mortgage rates had risen by the same amount.
Those borrowing £250,000 will have to find an extra £1,632 a year to cover the payments and for £400,000 it’s an eye-watering £2,604 extra a year.
Ms Suter added: “For borrowers on repayment mortgages they will have reduced their balance since they last brokered a mortgage, shielding them to at least some extent.
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This is because the current variable rate mortgage is 2.8 percent, according to data collected from the Bank of England.
This is set to rise to above three percent this month.
Ms Sute explained that the top two-year fix is 2.6 percent, if a person switches then they may be able to save.
If a homeowner borrows £100,000 they could possible save £276 a year by switching.
On a £250,000 mortgage that would equal a £696 a year saving and on £400,000 of borrowing a homeowner could save £1,116 a year by switching.
Immediately after the interest rate hike, HSBC raised the rate on its main fixed-rate mortgages by 0.45 and 0.5 percentage points.
Barclays, First Direct, Natwest, and Virgin Money then also announced an increase to their tracker rates.
Santander has stated that it is going to raise its rates from July and Nationwide from August.
