Who is affected?
The Bank of England base rate has seen its biggest rise in 30 years – what exactly does this mean for your mortgage? And what should your mortgage broker be doing about it?
Firstly, let’s unpick those the most affected by this steep increase because not everyone will be – although the media wouldn’t have you see it that way! Anyone currently on a tracker mortgage is directly affected because the rate at which the mortgage is repaid, follows The Bank of England base rate up or down. So, if the rate increases (which it has done) your payment increases. Similarly if the rate decreases so does your mortgage payment. Your payment will usually be adjusted accordingly the following month, so a fairly quick effect on your finances. Any expert mortgage broker would have explained this to you in full when advising you.
Opting for a tracker mortgage still comes with a set term, most commonly 2 years but the rate can change within that time frame. At the end of those 2 years, you will automatically go on to the lender’s variable rate, which is usually more expensive. Currently, a tracker mortgage is less expensive than a fixed rate option but with it comes the risk that it could go up.
Currently, and understandably many people will be very wary of opting for a tracker mortgage when remortgaging for this very reason. However, there is still a place for this type of mortgage. They can be fairly flexible and with some options you can avoid paying a penalty when you repay it if you to move for example. Again, with some options you can also overpay without a penalty. Or perhaps you are similar to some of my clients and are a ‘believer in the base rate’ – you believe that the base rate may come down in the near future so you stick with it!
Ultimately, a tracker mortgage is a great option if you’re not sure what your long-term property plan is.
Fixed rate mortgages
Aside from tracker mortgages, most people are on a fixed rate mortgage. It’s a set rate for a set period of time. Your mortgage rate will not change and neither will your payments, within that set time. So, for those who want stability and the ability to budget long term it is usually the best option. There is still an element of risk with a fixed rate mortgage however, the risk that if rates go down you wouldn’t feel that benefit. When a fixed rate comes to an end you can choose to go onto your lender’s variable rate, a tracker mortgage or a new fixed rate.
The bank of England actually has little effect on fixed rate mortgages and here’s why. Lenders are able to use money from savings, but they mostly tend to borrow money from other places to lend to you in the form of a mortgage. They borrow this money at a set rate and then lend it to you at a higher rate, which is how they make a profit. These rates are called swap rates and they are not directly linked to the bank of England base rate. Generally, there will be some form of pattern and correlation to The Bank of England base rate but the swap rate doesn’t automatically follow it.
Swap rates are influenced by many world factors – politics, war, economy, inflation, the value of the pound etc. Swap rates dictate fixed mortgages not the bank of England base rate. Not too long ago we saw first-hand how world affairs have a swift and direct effect on swap rates through Liz truss’ mini budget. It sent the economy into chaos and swap rates went through the roof with lenders withdrawing their rates. This happened only for a couple of days but it was due to the fact they didn’t know at what rate they should use to lend money.
In recent weeks we have seen a new chancellor and new prime minister, this brought about more stability, with swap rates slowly coming down too – which is good news for fixed rates. Lenders have continued to follow this pattern too, not by massive amounts, but they are slowly creeping down.
What is best for you?
There is no denying we’re in tough financial times right now. Knowing what’s best for your mortgage situation, whether that be a fixed rate mortgage or a tracker option, as they absolutely still have their place, is going to help you ride out the storm. Make sure that you use a qualified, expert mortgage broker to get the very best advice for your individual circumstances. My team of brokers are constantly monitoring mortgage rates and we know when is best to do your application, start again or get you a better rate if we know it’s likely to change within days.
If you want to make sure you have a broker who’s monitoring the market for you, we’d be delighted to answer any of your questions. Get in touch with us on 0300 981300 or email us at email@example.com .