Mortgages could rise by £200 a month after interest rate increase

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Earlier this week, the central bank made the decision to hike the nation’s base rate for the tenth consecutive time in the last year in an attempt to control inflation. The base rate is the rate at which banks, building societies and lenders are charged for borrowing money from the Bank of England. A consequence of this decision is that interest rates have skyrocketed in recent months with people now paying more towards their mortgage.

How much mortgage payments will increase will be dependent on whether households have a fixed or variable rate.

Through a fixed rate mortgage, the interest someone is charged stays the same for usually between two to five years.

Those on a variable rate mortgage will find the interest rate they pay can change depending on different factors, for example the base rate hike.

Experts are breaking down how different households will be affected by this week’s base rate decision from the central bank and sharing how families can financially prepare.

Tim Leonard, a personal finance expert at NerdWallet, spoke exclusively with about what this rise might mean for homeowners and mortgage rates.

He explained: “The biggest immediate impact will be on the monthly payments of those with a variable rate mortgage.

“This will include anyone with a tracker mortgage, which automatically ‘tracks’ the base rate. As a rough guide, if you’ve got a £200,000 tracker rate mortgage at 3.5 percent which now rises to four percent, you can expect your monthly payments to increase by around £50.

“If you’re sitting on your lender’s standard variable rate – or SVR – or have a discount mortgage, your lender has discretion as to whether your rate will change, but these also tend to follow the base rate.

“If you’re on a fixed-rate mortgage which has some time left to run, your payments will stay the same, as you have locked into that rate for a fixed period of time.

“However, if your existing fixed-rate mortgage is about to end and you want to remortgage, you’ll probably find that any new fixed rate deal will be more expensive than the one you’re about to leave.”

Over two million households are set to see their fixed-term mortgage come up for renewal sometime between December 2022 and December 2023, according to data from the Office for National Statistics (ONS).

Some 57 percent of people affected will be renewing a fixed-term mortgage rate that was fixed at a rate below two percent, meaning they could see significant increases in their mortgage payments

READ MORE: Recession fears continue despite UK economy growing

The mortgage expert gave a hypothetical scenario of a household which could pay £200 monthly in the wake of interest rates shooting up.

Mr Leonard added: “As an example, it’s estimated that the repayments on a £200,000 mortgage being renewed at a fixed rate of four percent, up from two percent previously, will increase by around £200 per month.

“Unfortunately, this increase in the base mortgage rate will have an impact on a homeowner’s monthly household budget.

“They may need to make changes to their spending habits or consider switching to a fixed-rate mortgage in order to secure a more stable monthly repayment amount.”

He also gave advice for households for families on a fixed rate mortgage which is coming up for renewal in the next year.

This includes knowing the rates at the beginning and end of the mortgage contract to better review the home’s finances.

Using a mortgage calculator will allow families to find out how much their repayments will be with the consequent rate increase.

Mr Leonard also recommends people preparing to renew to get an offset mortgage which will allow homeowners to reduce the amount of interest they pay on their mortgage by linking their savings account to their mortgage account.

The money expert said: “The money in your savings isn’t used to pay off your mortgage. Instead, it’s used to lower the total interest you’ll be charged on your repayments each month.

“However, it’s important to remember that if that money is removed from the savings account then the interest rates on these types of mortgages are often higher than what can be secured on other types of mortgages.”

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