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Potential base rate could increase annual mortgage bill by over £300

  • 31/01/2022
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Potential base rate could increase annual mortgage bill by over £300
The potential base rate increase to 0.5 per cent this week could increase annual mortgage bills by over £300.


According to research from Moneyfacts, which was based on a £250,000 mortgage over a 25-year term and if its average rate went up by 0.25 per cent, monthly remortgage repayments could be around £28.41 higher if the base rate was 0.5 per cent.

This would mean that over the course of the year a borrower would end up paying £341.28 more than before.

This is based on average rate pre-increase being 4.41 per cent and the average rate post-increase being 4.66 per cent.

Economists have said that there is a high chance, around 95 per cent, that the base rate could be increased to 0.5 per cent at the Bank of England’s Monetary Policy Committee’s meeting on Thursday.

This would take base rates to their highest level since 2009, and the higher mortgage rates could dampen the housing market and increase payments for borrowers.


Increased lender caution on affordability

Nicholas Mendes, mortgage technical manager at John Charcol, said that with inflation expected to increase throughout the year, there could be multiple base rate increases to 1.5 per cent by the end of the year.

He said household finances could become increasingly stretched this year, pointing to rising energy and fuel costs, anticipated rail fare increases, growing National Insurance contributions and inflation as factors all contributing to rising cost of living and playing on the mind of potential homeowners and moving plans.

He added: “Lenders can assess affordability at any moment in time and any decision making is typically driven by market conditions. With several lenders’ affordability based on income rather than considerations in the costs of living.

“But, as the costs continue to escalate, we could see lenders exercise caution and start to consider other factors to ensure the mortgage remains affordable.”

Mendes said the change could lead lenders who use Office of National Statistic (ONS) data for affordability to review this on a more regular basis and this could have an impact on borrowing calculations. They typically update their calculations on a quarterly or half yearly basis.


Longer-term fixed rates

Mendes said longer-term fixed rates, five years or more, now accounted for half of new mortgage lending, which was due to affordability changes, being able to borrow more on these fixed rate terms and the costs between two and five-year fixed rates becoming closer.

Consequently, he said many households would be protected from increases in the base rate but those on the final year of their fixed rate were borrowers of key concern.

He continued: “If you are looking at your mortgage with six months left on a fixed rate, and conscious you don’t want to pay an early repayment charge to switch to a new deal, you can fix a deal six months in advance with most lenders.

“If rates were to continue to decrease between now and then you could look at switching to a lower rate in that time with the lender. But if rates continue to increase you have secured your rate and won’t be effective by any impending rate increased in that time. A win-win in any outcome.”

However, he said that opting for a longer-term fixed rates came with considerations, such as the fact that longer-term fixed rates could be more expensive over the course of the term, as they have higher monthly repayments, whether the mortgage was portable or not and what early repayment charges apply.

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