Interest Rates Hike: Effect on Mortgages

The hike of interest rates by the Bank of England last week marks the first increase in interest rates in U.K. in a decade. The last time interest rates were increased was in July 2007. The interest rates have been increased to control the inflation that is currently affecting U.K. The base rate has been increased from 0.25% to 0.5%.

This decision of the Bank of England is not surprising as the 0.4% growth shown by the GDP in the last quarter had indicated such a move from the part of the bank. The Bank of England’s Governor Mark Carney too had hinted about interest rates hike.

Effect on Mortgages:

Homeowners who are on fixed-rate mortgages won't be immediately affected by the hike in interest rates. But, they'll be affected once their fixed term ends.

As far as standard variable rate (SVR) mortgages are concerned, if the mortgage amount is £125,000 and the remaining mortgage period is 20 years, the 0.25% increase in interest rates would cause a £15 monthly increase in mortgage payments and thus a £185 yearly increase in mortgage payments. Therefore, it can be seen that the increase caused in mortgage payments by the increase in interest rates is not significant. But, it must be borne in mind that the interest rates will be increased frequently and hence, eventually, mortgage payments could end up being much higher than what the borrowers had anticipated.

Impact:

It is too early to assess the impact of the interest rates hike on the people of U.K. The citizens of U.K. have been struggling with their financial needs ever since Brexit and the hike in interest rates leading to higher mortgage payments could severely affect their purchasing power and thus, their lifestyle. Further, pessimistic observations about the British economy by the Governor of the Bank of England, Mike Carney also didn’t sit well with many citizens. He made statements to the tune of the British economy having been permanently damaged by the financial crisis which occurred in the last decade. The silver lining of the interest rates hike is the possibility of some of the banks increasing the interests given on deposits. The Bank of England must be hoping that a decrease in the rate of inflation occurs so that the increase in mortgage payments is set off by the decrease in expenditure due to the low rates of inflation.