- Millions of households will never have experienced rates this high
- Today’s increase adds £384 a year in costs to a £250,000 variable rate mortgage
- Fixed-rate mortgage holders face big shocks when they refinance
- Collective impact of rate rises since last year adds £2,604 a year to £400,000 mortgage costs
Laura Suter, head of personal finance at AJ Bell, comments:
Savers
“A small rates war in the savings market has improved prospects for savers, who will be cheered by another increase to the Base Rate today after years of savings rates being in the doldrums. However, the timing will be bittersweet for many as they are having to dive into their savings to pay for the rising cost of living, just as they would have been able to generate a slightly more reasonable return.
“And inflation is still eating away at cash, with no savings rate coming anywhere near current 9% inflation. It means that even if savers are accessing the current top-rate easy-access account, which pays 1.56% from Virgin Money, they will still be losing almost 7.5% in real terms. On £10,000 of savings that is a loss of £744 a year in real terms.
“Fixed-rate accounts have marched upwards, with the top two-year fix rising from 2.5% last month to 3% today. However, anyone thinking of fixing their savings rate needs to be aware that they will miss out on any future Base Rate rises if they lock-in a rate today. Savers need to do a bit of crystal ball work to determine whether they think rates will rise significantly from here, but considering the Bank’s own base case is that rates will rise to 2.5% there is a lot of room still to go.
“Anyone with cash savings need to make sure it’s earning as much as possible, rather than dwindling in an account earning zero. Someone with £10,000 of savings currently earning 0.01% interest could make £155 by switching to the top rate easy-access account – not bad for 10 minutes work. And if someone had £30,000 of savings they’d be rewarded with £465 of extra interest for switching.”
*Based on figures from Moneyfacts, accurate to 16/06/22
Mortgage holders
“At the current average variable rate, today’s interest rate hike will mean someone with £400,000 of borrowing pays £624 more a year. At £250,000 of mortgage borrowing a homeowner will have to find £384 more a year, while at £100,000 of borrowing that increase is an extra £156 a year*.
“Considering 85% of all mortgages and 94% of new mortgages are on a fixed-rate deal, most people will be protected from today’s increase. However, the bigger shock will come when their deal is up and they remortgage – then they will face the full effect of all the recent interest rate hikes in one go.
“Someone who locked in record low mortgage rates in recent years would face a real financial shock if they came to refinance that debt today.
“The increase in Base Rate from 0.1% last year to 1.25% today means that borrowing £100,000 could mean payments of £648 extra a year, assuming mortgage rates had risen by the same amount. At £250,000 of borrowing that increase rises to £1,632 a year and at £400,000 it’s an eye-watering £2,604 extra a year**.
“For borrowers on repayment mortgages – the majority of owner occupiers – they will have reduced their balance since they last brokered a mortgage, shielding them to at least some extent. Nonetheless, faced with rising interest rates and the soaring cost of household bills, some families will choose to extend their mortgage term, spreading their repayments over a longer period to reduce their outgoings today. Although this costs more over the total lifetime of the mortgage.
“Even though mortgage rates have risen, those on variable rate deals can still benefit from switching. The current average variable rate mortgage is 2.8%, according to the Bank of England, which will rise to 3.05% after today’s increase. However, the top two-year fix is 2.6%, meaning that at £100,000 of borrowing a homeowner could still save £276 a year by switching. On a £250,000 mortgage that would equal a £696 a year saving and on £400,000 of borrowing a homeowner could save £1,116 a year by switching***.”
*Assumes a repayment mortgage with a 25-year term at the current average variable rate of 2.8%, based on BoE figures, and that the entire of today’s 0.25 percentage point hike is passed on.
**Illustrative numbers assume a repayment mortgage with a 25-year term and a 1% mortgage rate rising to 2.15%, reflecting the 1.15% base rate increase since last year being passed on in full. Actual borrowing rates will vary depending on a range of factors, including LTV.
***Compared to switching to the top two-year fix of 2.6% from Allied Irish Bank, on 80% loan-to-value. Rate was still available at time of release.
