Interest rate rises may be gradual but they will not be glacial, Michael Saunders, a member of the Bank of England’s rate-setting committee has said, hinting that homebuyers could see the base rate rise to 2% before long. So what would happen to your mortgage (and savings) if and when rates are hiked?
The base rate is currently 0.5%, so a rise to 2% implies an extra 1.5 percentage points on your annual interest payments. While that sounds low, it is equal to an extra £138 a month if you are the average homebuyer with the typical mortgage in Britain of £175,000.
The 500,000 borrowers on one of the most popular deals, Nationwide’s base mortgage rate tracker, would likely see their interest rise from 2.5% to 4%, taking the monthly bill from £785 to £923 on a £175,000 loan.
Things get hairier if the base rate rises to 3%, a level that the Bank of England governor, Mark Carney, has previously suggested could be the “new normal”. That would imply a Nationwide borrower paying £1,023 a month, or £238 more.
If you have fixed your mortgage – and 57% of borrowers have done so – then your monthly bill will stay the same until the end of the term on the deal. At that point, borrowers could be in for a “payment shock” if they fell back on their lender’s standard variable rate. Already there are signs that new fixed-rate deals are rising in anticipation of a rate rise.
But analysis by the Resolution Foundation has found that in reality as few as one in 10 households would be immediately affected by any rate rise because home ownership has declined, and so many of those with mortgages are now on fixed rates.
A more dramatic impact could be on house prices – and in turn on economic confidence. House prices have begun falling in London and parts of the south-east, and rate rises could push that decline into the Midlands and north.
But the good news is that interest paid on savings rates will finally move out of the doldrums. Britain’s biggest bank, Lloyds, currently pays a miserable 0.35% on its main cash Isa product, which will certainly rise if the base rate moves to 2%, although banks have a habit of delaying passing on any rise in interest rates.
