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|Mark Carney, Governor of the Bank of England (BoE), surprisingly announced recently that interest rates may well rise from their historic low of 0.5% earlier than expected. |
With the UK housing market and wider economy on the road to recovery, there is mounting speculation that the first rate increase could now be made later this year, or in early 2015.
“It could happen sooner than markets currently expect,” Carney said in his speech at the Mansion House on 12th June.
|An interest rate hike will undoubtedly have an impact on the housing market, as it will push up mortgage borrowing costs, which in turn could potentially slow demand from buyers.|
High levels of private sector debt would be “particularly sensitive” to a rate hike, the Governor added.
Research conducted by the HomeOwners Alliance and conveyancing provider Myhomemove found that 34% of homeowners fear that an interest rate rise will push them into financial difficulties.
|People living in the east of the country were most concerned about a potential rate hike, with 47% of people there saying a rise would make life more difficult, the study found.|
Should you be concerned?
No. You should try not to worry. An interest rate rise looks set to be introduced later this year or early next year, rather than within the next few weeks. But you should start to review your finances and see if you, as a homeowner, could put up with a rate increase.
What are your mortgage options?
You are exposed to a rise in the Bank base rate if you are on a variable rate mortgage – either a tracker or your lender’s standard variable rate (SVR). Borrowers on a tracker mortgage and some of you on an SVR will find that you will be paying an interest rate at a set margin above the base rate, and your repayments will increase the month after any rate rise.
You may wish to use a mortgage calculator to work out how much you would need to pay each month if rates did start to increase.
If you are on a variable rate mortgage, you may also wish to consider switching to a fixed interest rate so that you can take advantage of existing low levels of borrowing rates and be certain of precisely how much you will be required to pay each month.
Will switching mortgages cost you?
|You may have to pay an early redemption fee if you are locked into a tracker or other type of variable rate loan which has not yet expired. But if you are on an SVR mortgage or a deal without early redemption penalties you will not have to pay your existing lender to switch mortgages, although you are likely to face fees on your new mortgage – the lowest fixed-rate mortgage deals tend to carry the highest arrangement fees. Read up on more information about whether remortgaging is a good option for you.|
|You could potentially avoid having to pay administration fees as well as valuation and legal costs by remaining with your existing lender and switching to one of its fixed rate or fee-free deals.|
Who else will be affected by a rate rise?
Most of us will be directly or indirectly affected by an increase in interest rates, but one notable group of property buyers that will feel the pinch are international purchasers.
The UK pound has pushed above US$1.70 in recent days for the first time since the summer of 2009 after making steady gains as investors responded to the hawkish comments by Bank of England Governor Carney at his Mansion House speech last week.
Sterling is also trading at a recent high of around 1.25 against the Euro, while also making significant gains against other major foreign currencies, with the UK currency being supported by a strengthening economy, greater investor confidence, and ultimately growing speculation that interest rates will soon increase.
What does this mean? A more expensive UK pound makes it more costly for an overseas national to buy property in the UK.
A £100,000 property in England would currently cost a US national $170,000 to buy (based on an exchange rate of $1.70). But that same property would have cost that purchaser in the region of $135,000 when sterling was trading at around $1.35 against the dollar a couple of years back.
Impact: Fewer foreigners are likely to acquire property in the UK if the pound continues to strengthen (on the back of higher interest rates).
Is it all negative news?
No. A reduction in the number of overseas buyers will reduce overall demand for property, helping to potentially keep property prices relatively stable. What’s more, savers and people approaching retirement will benefit from a base rate rise as it will increase the interest rates on savings accounts – currently at record lows – and rates on the annuities available to pensioners. A rising base rate should also encourage banks and building societies to offer more attractive returns on savings accounts.