What will an increase in Interest Rates do to the cost of your mortgage?

What would a rise in interest rates mean for your monthly mortgage payments??

Thanks for clicking to read this article, it is my first on linkedin and hopefully not my last…. Where best to start than with a current ‘hot’ topic??

Inflation, interest rates and the monthly cost of your mortgage!

In layman terms, when inflation starts to rise, governments use interest rates to curb it.?

How does it work? By increasing or decreasing interest rates, they effectively impact the supply of money in the economy, through increasing or decreasing the cost of borrowing and the reward gained from saving.?

For example, as we are seeing at the moment, inflation is rising…. The government wants to control this, therefore they increase the Bank of England Base Rate. The impact of this is to make saving more rewarding as this interest rate increase should be reflected in the interest your bank pays you for saving… this means more people save versus spend, which means there is less money in circulation in the economy, thus, a downward pressure on prices and inflation.?

In addition to encouraging people to save versus spend, it also means less money in peoples pockets…. How? Mortgage costs!

Put simply, your mortgage interest rate is linked to the Bank of England base rate. It is usually, for example, the Bank of England Base Rate PLUS the rate your bank or lender will charge… this would usually be fixed for a 2 or 5 year term, or a ‘tracker’.

Therefore, if the bank rate rises, so will your mortgage rate (it would be nice of the lenders to absorb this, but they, or course, don’t!)…. This means that your monthly mortgage payments are more expensive, which means you have less cash in your pocket to spend in the economy. This results in a downward pressure on prices and inflation.

So, saving and higher mortgage costs take money out of circulation which reduces inflation. Which, is a win, as far as the government is concerned.

So, that’s a basic expatiation of why interest rates will rise…?

What does it mean to you and your mortgage?

Put simply, if bank of England rates rise then so will mortgage costs. After last weeks budget Natwest, HSBC, TSB and Barclays all raised rates in ANTICIPATION of a bank of England raise this week.?

Barclays for example, raised from 1.17% to 1.52% which equates to around GBP400 extra per year on a GBP200,000 mortgage. That’s GBP33 per month.?

Lets look at a GBP200,000 mortgage, and look at what different increases in rates would look like;

- Rate of 2.5%, means monthly payment of GBP897?

- 3% gives payments of GBP948

- 3.5% gives payments of GBP1,002

- 4% gives payment of GBP1,055

- 5% gives payments of GBP1,170?

An increase of around GBP54 per month for each 0.5% increase…!

How high are rates going to go??

Most experts believe the increase will be gradual… Mr. Neufeld of CEBR believes that “interest rates wont rise too quickly, I will be surprises if the Bank Rate us higher than 1% by the end of next years. But markets are sensitive to small increases in rates, it will affect demand and bring everything off the boil”.

He believes there will be a series of small increase this year and next, taking us near 1% by the end of next year, and potentially peaking at close to 3% in 2023.?

Whilst this does signal the end of super (historically) low borrowing for property investors, its not the end of the world… what can we do to protect ourselves from these increases in rates? Or set ourselves up for the best chance of success??

PPPPP or the five Ps, or ‘Property planning prevents poor performance’

Do your planning. Look at what impact a rate increase would have on your cashflow. Look at all potential scenarios.?

A simple excel sheet can help you do this.?

If looking at a new potential property purchase, how much ‘wiggle’ room do you have for rates to go up? None? Then perhaps look at putting down larger deposit, or look at a lower priced property with a higher yield, don’t overstretch. Give yourself wiggle room.?

What happened if rates reached 6%? Could you still pay your mortgage??

Look at different scenarios, plan, and then make decisions based on that.?

Re-mortgaging or locking in a lower rate now

If you are worried about increases in mortgage rates, then why not look at re-mortgaging onto a 2 or 5 year fixed rate? If done this year it would allow you to lock in lower rates before further Base Rate rises.?

Additionally, if you don’t have a property to remortgage now and you are looking at purchasing property for the first time, then get an offer from your lender as soon as possible. Offers are valid for up to 6 months… meaning you can buy yourself 6 months on the current lower rates…?

For example, I recently received a five year fixed rate offer at 4.2% with Skiptons, it is valid until the 22nd January 2022.?

Thanks for reading my first article! If you would like any more information on the above then please get in touch.?

Thanks, Callum?

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About Me;

I started working in property in the UK in 2011, managing property conversions, focusing on redeveloping and modernising Victorian city centre properties to create multiple flats within a property. Adding value and then selling on. My interest in property grew and after purchasing my first buy to let, and I decided to help others do the same.

I have helped people in Asia, Europe, and the Middle East realise this. My specialty is creating income through property, and ‘property for pensions’ and long term wealth creation. Using vehicles such as Buy to Let, off-plan, distressed property, HMO’s and auctioned property. Focusing on defining a clear property strategy to reach goals.?

I aim to make things easy for my clients, offering a friendly face and thought out, research backed advice based on my experience, those of my clients and those of our company.