How the increase in the Bank of England’s base rate could affect your mortgage – and why you should act now to save money
The Bank of England base rate rose from 0.1% to 0.25% just before Christmas and looks set to rise to 1% by the end of 2022. We find out why it's happening, how it will affect your mortgage, and how acting now can save hundreds, if not thousands, of pounds.
BY STEPHEN HARRISON
What is the Bank of England rate rise?
With festivities in full swing, many of us missed the fact that the Bank of England base rate rose from 0.1% to 0.25% at the end of December. Policymakers (who set the base rate), are expecting to see increases throughout 2022. But with fears of new Covid-19 variants, a recovering economy, and further restrictions, why is it happening now?
Put simply, it’s happening to control rates of inflation across the wider economy. Without increasing the base rate, inflation could boom and the cost of living will continue to soar as we’ve seen over recent years. Everything has gone up in price – property, bread, petrol, gas, electricity – the items we all need. This is because low-interest rates are seen as a stimulus, promoting positive activity across the economy. However, too much demand alongside an increase in wages and the cost of materials can see the cost of goods surge. Higher interest rates help subdue this.
Will your mortgage rate go up in 2022? Well, yes. Let’s put this into context:
Base rate in November 2021: 0.1%
Current base rate: 0.25%
Predicted rate in December 2022: 1%
- A £300,000 mortgage over 25 years, currently on a 1.75% deal = £1,235 per month
- When you remortgage next, if you don’t act now, you could find that your mortgage rate has increased to 2.65% as a knock-on effect of the 0.9% UK base rate increase.
- This might seem a small increase overall, but the reality is your monthly mortgage payments will increase to £1,368, or £133 extra, EVERY MONTH.
If we used these figures for the life of the mortgage (25 years), it works out as £39,900 in additional interest. Yes, interest! Which is essentially money being thrown away. That could be the deposit for another house, a brand-new car, or years of fantastic holidays.
How can you avoid paying more interest on your mortgage, and save money?
Easy, if your mortgage is due for renewal WITHIN the next six months, now is the time to start the process.
With a lot of lenders issuing offers that are valid for six months, now is your opportunity to lock in a rate while they are still low. Even if rates do rise as predicted over the next few months, because you have an offer, lenders will honour this and you are therefore protected.
The biggest mistake you can make is thinking ‘my mortgage isn’t due until June, so I’ll contact someone in May’. By then rates may have increased by 0.5% or using the example above, £67 per month. Over the next two years that would be £1,608 or over five years if you’re looking for that long-term stability, an extra £4,020 – all for simply leaving it too late.
How else could you take advantage of the current rate? How about releasing equity?
Prior to remortgaging, think about what you really want in the next few years. If you’re not planning on moving for a while, are you thinking about an extension? If you’ve spent a lot on credit cards over Christmas or loans for a new car – think about the benefits of potentially rolling these into your mortgage while rates are low.
Yes, now is a great time to release equity for things like home improvements. If you love the home you’re in but would like a larger floorplan or a new kitchen, releasing funds when remortgaging is quick and easy, and right now with rates being so low, it’s an option that thousands of people are turning to as an alternative. An equivalent £30,000 loan over 5 years would have a monthly repayment higher than £500 per month!
Likewise, with current credit card interest rates in the UK currently at around 15-20% and loans at around 6-7%, it often makes a lot of sense for us to be thinking about how to capitalise on these when our mortgage is due for renewal.
If you can secure a mortgage rate of 1.5% for 5 years (such as what’s available on the market now) – then it could make a lot of sense financially, as you’re exposing yourself to lower interest rates, and therefore have the potential to pay less back.
Of course, proper calculations are needed. With adding any debts to a mortgage, yes, you’re securing a lower rate, but you’re also taking it over a longer period of time, which could mean you don’t save at all.
However, this is the beauty of speaking to a mortgage adviser. Advisers do the calculations for you and are best placed to tell you if it’s going to save you money, or cost you more. From there you can then confidently move forwards in the decision-making process, with the confidence that what you’re doing is the best outcome for you and your family.
So, what should you do?
The important thing is to act now. Rates are low and inflation is increasing, meaning it is just a matter of time before the Bank of England and mortgage providers react. We’ve already seen rates recently increase and more increases are expected. Many will get caught short, but you don’t have to.
What is the mortgage / remortgage application process? Well, its easy and can be summarised in just 5 steps:
- Initial setup call with a North East based mortgage adviser
- They will then research your case and find the most economical deal for your situation
- Your adviser will call back to discuss their findings
- They will then guide you through the application process – securing your deal in the process
- The lender in question will then carry out its due diligence. Once done, your mortgage offer is issued and you complete on the mortgage with the help of a solicitor (normally provided for free, by the lender)
The process is quick and easy, and getting a new mortgage lined up and applied for, can be achieved within the same day.
Getting your mortgage offer and completed with solicitors realistically will take 4-5 weeks, however, if your deal doesn’t expire until June, you can sit on your offer, as they tend to be valid for 6 months.
Having an already agreed and in place ensures that if rates do go up in the meantime, you’re protected, and the lender will honour the original deal you applied for. This is the beauty of applying now.
Simple Remortgage also has vast knowledge in complex mortgage cases, for example:
- Where bitcoin is to being used for a mortgage application (which few lenders will do)
- Portfolio landlords with over 25 properties
- Day-rate contractors
- Mortgage applications if you have bad credit
- Self-employed individuals with only 1 years’ worth of accounts
- Joint borrower, sole proprietor (guarantor mortgage)
- Mortgages for property with large acreage
- Foreign income being used for a mortgage application
- Making your money go further… offsetting, buying multiple buy-to-lets instead of one and gearing them with mortgages to ensure greater coverage and growth when property values go up
For more information visit the Simple Remortgage website. You can use its free mortgage calculator to work out how much you could borrow, and what your repayments could be based on differing interest rates. You can also start the process to getting a new mortgage on the website, and an adviser will call you back at a time best for you.
Alternatively, call 0330 100 1231 for a no-obligation chat with a Simple Remortgage advisor.
ABOUT THE AUTHOR
Stephen Harrison previously worked for the UK’s largest Mortgage and Protection firm, helping them more than triple in size during his 9-year tenure. Initially starting as an adviser himself, Stephen became a Team Manager of 16 advisers, before moving into a training and development manager, where he oversaw the induction course for new advisers, sharing vast knowledge, and ensuring they were up to standard prior to being able to offer advice.
This work ethic continues to this day. On leaving, Stephen created Simple Remortgage with the aim of providing clients with a more user-friendly experience, with knowledge expanding beyond that of most, and a service clients know they can trust.
Prior to this Stephen graduated from Northumbria University with a First in Business Management and was even awarded the Lloyds Bank ‘Business Student Of The Year Award’ – ahead of all others graduating that year.