Interest Rate Challenges and Your Mortgage

Inflation is coming down at a snail’s pace. High inflation means the Bank of England is likely to increase interest rates - again. But what does this mean for your mortgage? If you are on a fixed rate deal, the increase in the Bank of England base rate will have no effect on you at all. However, if you are on a variable rate, it is almost certain that your mortgage rate will increase. So, what can you do?

Fixed Rate Mortgage vs Variable Rate Mortgage

When you have a fixed rate mortgage, your monthly payments will be fixed for a period. Fixed rate mortgages generally run for 1, 3, 5 or even 10 years (and there have been some fixed rate mortgages for the lifetime of the mortgage). That means the rate agreed at the outset will remain for the entire period of the agreement. Once the agreed time for the fixed rate ends, you will then be automatically transferred to the lender’s variable rate.

When you have a variable rate mortgage, the interest rate applied will vary as Bank of England base rate varies. In addition, your lender is not tied to increase your mortgage by the same percentage amount the Bank of England increase bank base rate. Your lender can increase the rate by as much or as little as they want.

If you have a fixed rate mortgage, you have certainty about your monthly payments. If you have a variable rate mortgage, the rates can vary when the Bank of England base rate varies.

What happens when interest rates are falling?

Clearly, if Bank of England base rates are falling, the variable mortgage rate will probably fall. Again, your lender does not have to pass on the full amount of the reduction so your mortgage rate might not fall quite as much or quite as fast. A fixed rate mortgage will be unaffected.

My fixed rate mortgage is coming to an end – what should I do?

If you have a fixed rate mortgage nearing its end, you have a choice. Your mortgage will automatically revert to your current lender’s standard variable rate at the end of your fixed period. Depending on timing, this might be lower than your fixed rate and that means you will pay less than you were on your fixed rate. However, if the rate is higher, you might consider another fixed rate.

Moving to a fixed rate

If your current lender offers a fixed rate you are happy with, speak to them about moving onto that. If not, it will mean you will need to re-mortgage. This involves legal work and the associated costs, including a fee to your new lender.

A fixed rate mortgage will give you certainty. It is likely to save you money when interest rates are rising. But it may cost you more when interest rates are falling. Whatever you do, it is important to seek financial and legal advice. Paris Steele are here to help when it matters most, should you require any assistance please do not hesitate to contact us.