Friday 12 August 2016

Finance Fridays – What affect do interest rates have on mortgages?

Welcome to this week's Finance Fridays. Last week we were looking at the rise in popularity of Contactless cards and discussing how safe they are to use. This week we are talking about the interest rate change that was announced by the Bank of England and how this affects mortgages.

What has happened? - Last Thursday the Bank of England announced the first cut in the Bank Rate since March 2009. This means the interest rate has gone from 0.5% to 0.25%. This rate change affects what mortgage rate lenders offer and therefore the monthly cost of paying the mortgage for homeowners depending on what type of mortgage rate they are on.

Standard Variable Rate – Often referred to as the SVR this is the one basic rate that lenders offer. If you have been on a special rate and it has run out you will be transferred onto this rate if you don't make the effort to move to a better deal. It's well known that mortgage lenders make a lot of money from borrowers on the SVR as it is usually always higher than any other rate they offer.

The variable nature of the rate means that at anytime the mortgage lender can change the rate even without the Bank of England announcing a change in the Bank Rate. In the past lenders have been very quick to increase rates when the Bank Rate has risen but far less keen to decrease them when they go down. Barclays, Nationwide and Santander announced straight away they would change their SVR from 1st September whilst other high street lenders have said their rates are 'under review'. The Governor of the Bank of England, Mark Carney, has said there is 'no excuse' for lenders not to pass the decrease on but they are not obliged to.

Fixed Rate – If you are currently on a fixed rate mortgage deal then last Thursday's announcement will have no affect on you at the moment. A fixed rate is just that so it will not go up or down during the term of the deal. If things stay as they are once your deal comes to an end a new fixed or tracker rate should be lower so see what your lender offers or shop around. If you don't do anything you will revert back to the SVR which will be higher.

Tracker – These type of rates track the Bank of England Bank Rate. In recent years they have effectively been fixed rate as the Bank Rate has changed at all. However now borrowers should reap the benefit of being on a tracker rate. There are some caveats to this though. Some tracker rate deals have a 'cap and collar'. This means the interest rate won't go higher or lower than a specified rate. While most lenders are passing on the tracker rate decrease from 1st September Virgin Money are making their customers wait until 1st October.

Remortgaging – If you are on a SVR there is no better time to think about moving onto a fixed or tracker rate mortgage. First approach your lender and see what they can offer. If you have had no missed payments it should be straight forward as many won't require any new surveys to be completed. Have a look online for deals for existing customers. If you want to shop around be prepared for a new lender wishing to charge a fee for new customers which can add up to over £1,500. I've found a great fixed 2 year rate of 0.99% but it requires a valuation fee of £173 and a booking fee of £1,499. Over the term of the mortgage it may work out cheaper to the overall cost to pay a fee and take the lower interest rate. If you you to compare mortgage rates that have fees and no fees there's a comparison calculator on Money Saving Expert.

If you are in the middle of a fixed or tracker rate deal your current lender may allow you to move to another without any charges but do check with them. However, if you choose to move elsewhere you will probably find you will need to pay an early repayment charge which will be a percentage of the outstanding mortgage amount.

Have you got a mortgage rate that will be affected? Are you thinking about remortgaging?

We were joined last week by Jane from Maflingo who has shared her 10 tips to reduce food waste and save money. If you are confused about use by, sell by, display by and best before dates have read of Jane's explanation.

If you want to join in with this week's Finance Fridays then add your link to the linky below. Any post concerning financial matters is allowed. Full details here. It doesn't have to be published today as you have until 23.55 on Tuesday 16th August 2016 to join in.
Finance Fridays

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  1. I was fascinated last week when the BoE cut the interest rate - I didn't think it would get any lower but as we are on the SVR it is great news for us. Thanks for keeping us informed - it's good to be aware of what is going on with interest rates.

  2. There are times I am glad I rent instead of own as all this baffles me but this post had helped me to understand much better!

  3. We are locked in for a few years at the moment on a fixed rate and find it gives us some security. I'm not sure that the rate cut will have a massive effect on fixed rates because of the realities of buying trances of money on the markets (worked for a mortgage lender for years), but certainly a good time for a shorter term fixed rate.

  4. We are on a fixed rate so we know where we are every month, I think it's due to run out soon though so will see what other deals are out there

  5. Thanks for sharing this - it'sa minefield isn't it x

  6. thanks for this, I find it super confusing at the best of times! xx

  7. I always learn so much from your blog! Thank you! :)


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