What rising interest rates mean for mortgage borrowers

Chancellor Rishi Sunak has reportedly told other members of Boris Johnson’s cabinet that he expects interest rates to rise

Inflation has driven up the cost of living for everyone in the UK, with fuel prices, energy bills and food prices all rising rapidly.

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Chancellor Rishi Sunak has reportedly told colleagues in Boris Johnson’s cabinet that he expects borrowers will be required to pay more over the next year.

Could homeowners be about to pay more in mortgage repayments? (photo: AFP/Getty Images)

So why are rates likely to rise – and by how much could they rise?

Here’s what you need to know.

Why is the Bank of England changing interest rates?

Interest rates and inflation are closely linked – a fall in one tends to cause the other to rise and vice versa.

The Bank of England, which controls UK monetary policy independently of the government, aims to keep inflation at 2%.

In a bid to lower that 30-year high figure, the bank raised base interest rates from 0.25% to 0.75% in March.

In essence, it raised the cost of borrowing in a bid to slow spending – although the Bank of England said it would take time to work and would not prevent inflation from peaking at 8% in April or in May.

The Bank of England plays a key role in determining the cost of borrowing money (Image: Getty Images)

He predicted that inflation would return to the target rate in “the next two years”.

Economists on its monetary policy committee, which sets interest rates, are due to meet on May 5, 2022 to decide whether to raise interest rates again.

It is therefore unlikely that the Bank of England will allow inflation to turn into deflation.

How do interest rates affect mortgage rates?

When you take out a mortgage, interest rates are what you pay on top of the amount you borrowed to buy your home.

You have to pay interest because it costs the lender to borrow money from the Bank of England and they will also want to maintain the value of the money you have borrowed from them.

While high street bank interest rates will be influenced by the Bank of England base rate, they will vary depending on other factors, such as the risk of lending you money.

The interest you pay on your mortgage is determined by the Bank of England and your circumstances (Image: Getty Images)

The amount of interest also depends on whether you have a fixed rate or variable rate mortgage.

Those with fixed rates will see the level of interest they pay on top of what they borrowed fixed for a period of time.

The rate will take into account potential increases in the base rate.

Those with variable rates will see their mortgage repayments change depending on the extent of the rate change by the Bank of England.

So if you have a mortgage of £130,000 and want to pay it off over 25 years – if the interest rate is 2.5%, the monthly repayment will be £583.

But if the interest rate increases by 0.25% – as it did in March – your monthly repayments will increase by £17 to £600.

How much could interest rates increase?

According to an article in The Times, Rishi Sunak warned other government ministers against trying to borrow more to fund government spending, as he expects interest rates to rise.

He also warned the cabinet that further borrowing could worsen inflation and advocated cutting the deficit to keep interest rates low.

Rishi Sunak is said to have pushed government ministers to avoid borrowing to fund public spending (Image: AFP/Getty Images)

The Times said Mr Sunak expected base interest rates to rise to 2.5% over the next 12 months – a change that could see homeowners paying more than £1,000 more per month. year if they did not benefit from fixed rate agreements.

The Chancellor reportedly said a one percentage point increase would equate to a £700 increase in mortgage repayments.

What are the best mortgage rates right now?

Given that interest rates have changed a lot over the past two years – dropping dramatically to help the economy keep going during the Covid-19 pandemic before rising rapidly to deal with the surge in inflation – mortgage rates have moved a lot.

Also, not all high street lenders post their interest rates online, as some like to check your situation before listing their offer.

It is therefore worth visiting the websites of the major banks to see what mortgage deals they offer.

The consensus among experts, including Martin Lewis, seems to be that it’s a good idea to get a fixed mortgage rate before interest rates rise.

However, given the proximity of the next meeting of the Bank of England’s monetary policy committee, bargains might not be so easy to find.

Stephen V. Lee