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BoE's 1.25% rate marks fifth consecutive rise, sparking frenzy

Property concierge platform, Moveable, responds to news with guide to mortgage deals.

British lenders have started to ramp up the price of mortgages across the country after the Bank of England raised interest rates to 1.25% amidst a looming economic recession.

While recent homebuyers on fixed-rate deals may not feel the impact of this yet, many existing homeowners will be rushing to find the cheapest possible deal. With a slash in disposable income and a 40% rise in energy prices on the horizon, borrowers are now choosing longer fixes in an attempt to ride out the considerable economic uncertainty.

Property concierge platform, Moveable, explains the various options that borrowers can choose from, and the type of homeowner that would be best-suited for these deals:

Fixed-Rates

75% of Britain’s 8.96 million mortgage borrowers are on fixed deals – according to the banking trade body UK Finance – meaning they are not directly affected by the base rate. However, lenders will normally offer deals proportionally higher than the base rate. Further to this, a potential fall in interest rates will not decrease your monthly payments. The average interest payable on a fixed-rate mortgage is now at £276 a month – according to UK Finance.

The fifth consecutive rise is set to create a frenzy for homeowners as many are now on the hunt for the cheapest deal possible. Around 1.33 million fixed deals are scheduled to end this year – the most since 1.34 million in 2018 – and Brits will likely be looking to secure another fixed-rate deal in case the base rate continues rising. This deal is likely to be most beneficial for first-time buyers, and those looking for peace of mind with the current state of economic uncertainty.

It is important to note that if your circumstances or the market changes before your fixed-deal expires and you decide to break your agreement, you will need to pay an early redemption fee. For example, if you break a five-year fixed-rate deal in the first year, you’ll have to pay a 4-5% penalty, 3-4% in the second year, and so on.

Further to this, the Treasury and the Department for Levelling Up, Housing and Communities has announced plans to introduce 30-year fixed rate mortgages in the next few months. A long-term fixed mortgage deal could pull 2 million Brits out of the rental market and into home ownership – according to property and think-tank veteran, Graham Edwards.

Standard Variable Rates (SVR)

After your fixed-rate deal ends, you will shift onto SVR and stay on this rate as long as your mortgage lasts or until you take out another deal. The average rate of these was 4.51% at the start of this month – up 0.69 points from last October, according to L&C. Around 1.9 million borrowers on SVR or tracker mortgages will be directly impacted by the recent base rate rise.

SVR deals provide flexibility and freedom for homeowners as they have the ability to leave at any given time. However, with interest rates projected to continue to rise throughout the year, those on SVR may be looking to secure another agreement to ensure that they're not paying over the odds for their current deal.

Tracker Rates

Tracker rates move directly in line with other interest rates – normally the Bank of England’s base rate – but are set at a level just above. They normally fluctuate more than a fixed rate so if the base rate goes up by 0.5%, your rate will increase by the same amount. This specific deal typically has a short lifespan – around two to five years – however some lenders offer trackers for the whole duration of your mortgage repayments or until you switch to another deal.

The average two-year tracker mortgage rate was 1.58% in December and now it’s up to 2.21% – an extra £60.89 more a month on a £200,000 loan.

Homeowners looking for more flexibility may opt to choose a tracker deal; however, this is balanced against the peace of mind that a fixed-rate deal offers. You may also have to pay an early repayment charge if you want to switch your deal before it ends.

Discount-rates

A discount-rate mortgage offers a discount on the lender’s SVR for a set period of time – usually two to three years. Whilst the discount itself is set in stone, your repayments could go up or down if the lender’s rate changes. This is normally in line with the base rate; however, this can sometimes vary.

For example, if the lender’s SVR is 4% and the discount rate is 2.5%, your interest rate will be 1.5%. But if the SVR goes up to 4.5%, your mortgage rate could increase to 2%.

Many people choose a variable or tracker mortgage to keep in line with the Central Bank’s base rate, and so they’re not locked into a deal with the chance that interest rates go down – which seems unlikely in the next few months. However, it is vital to plan to avoid automatically reverting to the lender’s full SVR at the end of the deal, as this could be extremely costly.

Simon Bath, CEO of iPlace Global, comments, "With the Central Bank’s interest rate rise at the forefront of many homeowner’s minds, the main question remains – which mortgage deal would be best suited for me?"

"It’s important for prospective homebuyers to consider the wealth of options they have in front of them, especially because the market is now a lot more consumer led. There are so many products nowadays ensuring that those who lenders consider to be 'risky', have the opportunity to find a deal that is most suited to them."

“It’s key to note that many of the mortgage deals differ based on a peace of mind and flexibility. Ultimately people must always factor in the constraints around affordability amidst the cost-of-living crisis, as mortgage rates are most definitely set to climb in the coming months."

“The issue with the current climate is that lenders often see first-time buyers as a risky proposition, making it harder for these people to secure a mortgage deal. By introducing a fixed rate for a longer period of time, it removes this barrier and gives more Brits a greater chance to get onto the property ladder."

moveable.uk

 

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