After staying the same for the last three years, the Bank of England decided to use its December 2021 meeting to start raising the interest rate from its record low of 0.10%. The widely predicted move comes as inflation continues to rise – something monetary policy makers hope to stop.
So what does the new interest rate of 0.25% mean for those with a mortgage? The good news is most will not see any change to repayments, as figures from financial trade body, UK Finance, indicate that 74% of all current mortgages are fixed and as a result, the monthly repayment is protected.
For the other 26% on tracker or variable-rate mortgages – who will typically pay an extra £10 to £15 more every month as a result of the rate hike – thoughts may turn to moving to a fixed-rate product, especially as experts widely believe further rate rises could be on the cards as we move through 2022.
Talk of fixed rates brings us neatly to other news from the world of mortgages – another 40-year, fixed-rate home loan being launched to the UK market. This unusually long term, with a rate that remains unchanged for up to four decades, may spark interest among nervous borrowers who would like a buffer from further interest rate rises.
Committing to the same mortgage product for 40 years does, however, need careful consideration. Although there is financial security in the fact that the mortgage’s rate, and therefore the monthly repayments, will remain unchanged – even if interest rates rise – the home loan’s small print needs reading.
Before borrowers get excited, they’ll need to check they’re happy with the product’s rate of interest, given that they’ll be living with it for a number of years. They should also confirm they have the necessary deposit or equity needed to meet the lender’s loan-to-value criteria.
Those interested in long-term, fixed-rate mortgages will also need clarification about ‘porting’ the mortgage, which is the ability to take the mortgage with them if and when they move home. It’s also worth checking the cost of paying the mortgage off early, which can incur early redemption penalties.
There is another piece of finance news that may affect borrowers for the better in 2022. Although it remains a consideration at this point – and the news was announced before December 2021’s interest rate decision – the Bank of England is mulling over easing mortgage affordability checks.
Any change would affect how borrowers’ financial capabilities are assessed at the application stage. Currently, lenders want proof that a borrower could afford repayments if interest was charged at its standard variable rate, plus three percent.
The Bank of England may downgrade the three percent figure, making it easier for more people to pass the affordability checks and potentially borrow greater sums of money. We will provide updates when further details are released.