Mortgage costs could rise by £450 a year if Bank of England hikes interest rates this week
Homeowners could see the cost of a new fixed rate mortgage jump by £450 a year if the Bank of England increases interest rates this week.
The Bank of England has held the base rate at 3.75 per cent since December last year, with its next decision taking place on Thursday.
But with inflation still trending above the central bank’s target of 2 per cent and likely to rise over the coming months, there are fears that policy makers will opt for a 0.25 percentage point hike to 4 per cent.
The Bank of England uses interest rate rises as a lever to curb borrowing and spending when inflation gets too high.
Based on a typical mortgage, a base rate rise of 0.25 percentage points would increase mortgage payments by around £450 a year, according to Moneyfacts.
It says a 0.5 percentage point rise would equate to a £906 annual increase.
Big cuts unlikely: The major banks have priced their lowest fixed rate deals for remortgaging households at just above 4.5%
Rachel Springall, finance expert at Moneyfacts, warns indecision could be costly for borrowers hoping for lower mortgage rates to surface.
She says: ‘Indecisiveness could be the biggest enemy for borrowers this year.’
‘Rate increases can add hundreds of pounds a year to mortgage repayments, as already proven by recent mayhem in the mortgage market.
‘It is highly unlikely that lenders will make substantial cuts in the months ahead until there is a clearer path for future rate setting.
‘The cost of living is expected to worsen in the coming months which puts pressure on the Bank of England to consider a rate increase.’
In fact, Springall suggests that now could be a good time to lock in a fixed deal just in case mortgage rates do rise.
Homeowners can reserve a new mortgage rate as early as six months before their current one ends.
If they then see a cheaper deal, they can usually switch until just before the new mortgage begins.
‘Economists expect global markets to remain unsettled, with the unrest in the Middle East now over 100 days in,’ adds Springall.
‘Fixed mortgage rates have come down from the peaks seen in April, but any further unexpected rises will hit those who have sat on the fence before refinancing.
‘Borrowers could be better off by locking into a new deal early with their existing lender, either three to six months ahead of when a fixed deal ends, but it’s also worth shopping around too.’
Will the Bank of England hike rates?
While there is a greater chance of the central bank hiking rates than cutting, another hold remains the more likely outcome on Thursday.
However, even if they do continue to hold at 3.75 per cent, it’s likely to be a wise move for homeowners not to just simply wait and see.
Mortgage rates have been edging down, with major lenders including Nationwide, HSBC, NatWest and TSB reducing some fixed-rate deals in recent weeks.
Nationwide Building Society cut remortgage rates for its existing customers last week, with the lowest rates for those remortgaging with the lender now starting at 4.56 per cent.
TSB, HSBC, NatWest and Santander are all offering similar priced rates.
Sarah Tucker, of HomeOwners Alliance, says: ‘If you’re one of the 1.8 million homeowners due to remortgage this year, don’t put off reviewing your options while waiting for Thursday’s announcement.
‘Mortgage rates are driven by expectations of where markets are heading, not just a single day’s decision.
‘Locking in a deal now can provide certainty, so you avoid the impact of any rate rise, while still being able to switch to a cheaper rate if rates fall further before completion.’
