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How it will affect your mortgage and your savings

Rising Bank of England interest rates mean higher monthly payments on business and homeowners debt. Photo: Toby Melville/Reuters

Around 2 million households are facing a hike in monthly payments following the Bank of England’s decision to raise the interest rate to 1%.

According to credit app TotallyMoney, a 1% rise above the 0.1% the base rate has been sitting at for most of 2021 will increase mortgage payments by £99 a month or £1,188 a year for a 75% loan-to-value ratio (LTV) mortgage on the average UK property costing £270,708.

In the UK, around 850,000 properties are on tracker mortgages, which directly track the Bank of England’s base rate, while 1.1 million are on standard variable rates which track a rate set by the lender, which generally closely tracks the BoE interest rate.

Read more: Bank of England raises UK interest rates to 1%, highest level in 13 years

The Bank of England interest rate sets the level of interest that all other banks charge borrowers. This base rate affects other interest rates, including the mortgage base rate.

If the interest rate increases, payments on a variable rate mortgage will increase. This is usually a tracker that tracks the base rate or a standard variable rate loan from a lender.

In London, research found that mortgage payments will rise to £191 per month or £2,292 per year for a 75% LTV mortgage on an average London property costing £519,934.

Those in the South East with an average house price of £369,093 would see their annual costs rise by £1,620 under the same conditions.

In the North East, with an average price of £149,249, a 75% LTV mortgage would cost an additional £648 per year.

The following tables show the monthly and annual cost of a 1% rate increase on a 25-year mortgage based on three separate loan-to-value ratios.  Source: research commissioned by TotallyMoney

The following tables show the monthly and annual cost of a 1% rate increase on a 25-year mortgage based on three separate loan-to-value ratios. Source: research commissioned by TotallyMoney

TotallyMoney’s analysis found that one in four mortgage customers currently had no protection against interest rate hikes and were already facing higher payments.

Alastair Douglas, CEO of TotallyMoney, said: “As the Bank of England raises the base rate to ease inflationary pressures, the two million homes benefiting from variable rate and tracker mortgages will see their household finances still tighter.

“And the situation is not going to improve much for those who are nearing the end of their current contracts. They have the choice between facing the more expensive SVR or having to switch to a new, more expensive fixed rate product.

He added: “Customers are feeling the pressure of the rising cost of living should consider reducing the use of expensive lines of credit such as overdrafts and moving interest-bearing credit card balances to a 0% offer.

“By reducing the interest paid, customers can pay off their debts faster or use the money saved to cover other costs.”

Read more: UK mortgage borrowing hits £7bn as house prices rise

Owners with fixed rate agreements will only feel the effects at the end of their fixed term and they will be transferred to their lender’s standard variable rate (SVR).

Research from MoneySuperMarket found that consumer interest in 10-year mortgages is at an all-time high as homeowners seek to lower their monthly payments with rising interest rates.

While experts predict interest rates could hit 3.8% this year, data from the MoneySuperMarket site reveals that 18.1% of remortgage applications in March were for 10-year fixed agreements. This is compared to 3.8% 6 months ago and 2.9% 12 months ago.

Read more: Bank of England: Russian-Ukrainian crisis could push up UK inflation

Ashton Berkhauer, Mortgage Expert at MoneySuperMarket, said: Interest rates have a direct impact on mortgage repayments, so it’s no surprise that with rising rates and such economic uncertainty, homeowners are looking to do longer deals and give themselves some protection. financial.

“However, while 2- and 5-year solutions are common, the growth in interest for 10-year contracts is remarkable and a sign of owners’ growing concerns about rising interest rates.

“Whatever your view on the prospect of further rate increases, it’s always important to make sure you have the right mortgage deal, so be sure to do your math and research the best deal for your needs.”

However, a higher base rate is good news for savers, who will get better returns.

Alice Haine, personal finance analyst at investment platform Bestinvest, said for savers a rise in interest rates can only be a good thing, but they may need to be patient. .

“Savings rates will rise very slowly and very gradually over the coming weeks and months as banks and building societies can sometimes take their time to pass on the rise. Savings rates could also rise thanks to the end of quantitative easing.

“However, despite rising rates, when adjusted to very high levels of inflation, real returns on cash savings are deeply negative and so hoarding large amounts of money for long periods of time is a sure way to get worse.

“If you have money to stash away for short-term needs or want to park your emergency jar somewhere that yields a healthier return, look for the best savings account. Every extra penny of interest is a bonus at a time when high inflation is eating away at the purchasing power of cash savings. With many households tapping into emergency pots during these financially tough times, you want to make your money work as hard as possible for you.

“For those who want to save longer, then it would be wiser to invest that money to protect it from the double whammy of low savings rates and high inflation. While higher stock market returns are never guaranteed, a long-term approach means your investment portfolio can absorb the ups and downs and provide better growth in the process.

However, Hinesh Patel, portfolio manager at Quilter Investors, warns the gains will be minimal.

“Savings rates may improve from this rate hike, but they will only marginally offset the cost of living crisis we are currently facing. With the Fed tightening rates last night, many will have hoped to have seen the same from the BoE today. With inflation continuing to soar, the Bank risks doing too little too late,” he said.

Becky O’Connor, head of pensions and savings at Interactive Investor, agrees. “People with cash savings have been losing money in real terms for quite some time, on top of a decade of low interest rates.

“Some savings rates will now go up, but not all – and certainly not all in line with the base rate hike. reward, the bad news is that you’ll really have to hunt for the best rates and accept that inflation will most likely continue to erode your returns for some time to come.

“If you don’t need the money for a few years, investing might offer higher returns. But there are caveats, as higher rates and high inflation also affect investment returns in different ways.

Watch: How does inflation affect interest rates?