If interest rates rise.............?(14 Posts)
Please forgive my ignorance, we bought our house toward the end of 2009 and so have only ever known very low Bank of England rates (think its been 0.5% since we bought). If interest rates rise, will my mortgage rise accordingly? I know it obviously will rise, but what I mean is that my mortgage rate is currently 5.7%, so if rates went up by 5% to 5.5 (which I think is a fiarly normal pre-ressesion rate?) would my mortgage also go up by 5% to 10.7% or would the mortgage provider be likely to absorb some of this rise?
Before the ressesion when the base rate was higher, were mortgage rates generally 4-5% above the base rate, or were the closer to it? I'm trying to factor some potential for rate rases into my budget as we are hoping to move and take on a larger mortgage, but looking online suggests that rates were once at around 15%!!! That would take my mortgage upto 20.7% surely no one can bedget to afford that??
Mortgage interest rates normally track the Bank of England base rate, so are base rate +4% for example. If the base rate rises by 0.5%, you am expect your mortgage rate to increase by at least 0.5%. When the base rate is changing frequently, this could mean you have to find say, £100 extra every month, with no notice.
The alternative is a fixed rate which sets an interest rate for a period of time. This tends to be a bit more expensive (higher rates) but is easier to budget for.
It depends on what type of mortgage you have signed up to. If it is a fixed rate mortgage, it won't matter what the Bank of England base rate does as you will have signed up to a particular % interest for a fixed period of time.
If,however, you have a tracker mortgage which tracks a certain % ABOVE the Bank of England base rate, then yes your mortgage will increase as the base rate does.
Equally, if you come out of any fixed term mortgage you will revert to you bank or building society's standard variable rate. This they can do pretty much whatever they want with. I.e even if the base rate only goes up by 0.5%, they may well increase the standard variable rate by a full 1% (or some such variation on the theme!)
No - when we had mortgage rates of up to 15%, that was what we were paying, not what the 'base rate' is.
so currently, the 'base rate' is 0.5% (ish) and you are paying 5.7%.
So, either you have a variable mortgage of "base rate plus 5.2%" or you bought a 'fixed rate' of 5.7%. If you are fixed, then your mortgage won't go up for the term of the fix
although there will probably be some small print excluding a MASSIVE rise in rates.
Does that make sense ?
When the base rate rises generally banks want to pass that on to their customers. When that impacts you depends on what mortgage product you are on:
- if a Tracker then you would expect your rate to rise equal to the base rate rise
- if a Fixed then your rate would not rise, but when the fixed rate ends you could expect to pay more
- if a Std variable then you would expect your rate to rise similar to the base rate rise.
- there are other products, but these are the most common.
You can use plenty of free online repayment calculators to work out how much extra a rate rise of x% would cost you in £. You are currently paying quite a high rate relative to the base rate so I assume you have a high LTV, i.e. you didn't have a large deposit.
You always want to look ahead and think that in 3 years you could absorb a rate rise of x%, i.e. not stretch yourself to the max unless you know your wealth or income will increase. How much you budget for depends how risk adverse you are. My parents were very cautious with debt so even when they were paying 12% we still had holidays etc as they had a modest home.
Personally I tend to budget that I could deal with a rise of several per cent - even though I don't personally expect the bank base rate to rise for years.
I should have added that of course it's not a question of "if" interest rates rise but rather "when".
Thanks all, that is really helpful. I'm currently on a fixed rate, and when we move I plan to go for another fixed rate, was thinking of 5 years to try and have some certainty over my mortgage payments for a while (although it seems that a lot of people don't think rates will rise in the next 5 years, but not sure I could afford to take that chance- and looking on money supermarket the variable and tracker mortgages are coming up with higher interest rates than the fixed?!).
What I'm really trying to figure out is what my interest rate might be when I come out of my fixed period. I think so far I have been deluded into thinking that around 5% is a normal rate to be paying on your mortgage. But I'm now thinking that maybe this is a low rate due to the bank of England rate being so low, and that I should be budgeting for a potentially much higher rate when my five year fixed period is up?
I know that no one can predict what rates will be, but I suppose I'm just wondering what a more 'normal' interest rate to expect in future would be, if there is such a thing! I don't want to take on a big mortgage and be stuck in 5 years if all the fixed rate deals are at 15%.
Forgot to say, sorry if I sound a bit dull! I would just hate to commit to something I couldn't afford in the future due to thinking 5% was normal in in fact it isn't.
Rates only reached the heights you're worrying about v briefly last time round. I think it is hard to know what long term 'normal' looks like - we want to be able to cope with 8% comfortably. by the way there are a couple of ten year fixes- higher than the 5yrs of course but maybe what you want?
Thanks Cheshire, its so hard to predict, and I think that if I think about it all too much I will just sell my house and move in to rented! 8% sounds like a good starting point, I will have a look how much that would increase the mortgage by. Good to know that 15% isn't a normal level, I can't imagine how people coped. So many people I have spoken to in real life just haven't given it any thought beyond whether they can afford the mortgage at the present rates.
Thanks BackforGood, that is a relief to hear, I assumed that they were referring to the Bank of England base rate when they said rates went up to 15% so thank you for clarifying.
by chance, this is one of the reasons why some people hated the Thatcher woman.
When interest rates went up to 17%, many people couldn't afford to keep their homes. Some sold up, some were repossessed, some built up unmanageable debts. Obviously young first time buyers couldn't afford houses.
I happened to move into a close of self-build houses towards the end of the era. Only two families had managed to keep their home, and one of these had to give up later.
The situation in the 70s & 80s (and it started long before Thatcher btw) was slightly different, of course, on account of inflation being completely out of hand. And inflation was in the main the friend of the young first time buyer as it diminished his debt. So high interest rates were not as painful as they sound now.
But back to the op, it will depend. At the moment, mortgage rates are very high compared to the base rate. Only a few years ago, you could get tracker rates BELOW the base rate. So if base rates go up a lot, I would hope that the gap between base rate and trackers narrows.
sadly Thatcherite monetary policy used high interest rates as a deliberate weapon to bring down high inflation and overheating in London and the South-East.
The policy affected the whole country though, and led to industrial collapse as well as high mortgages. This is one of the reasons why opinions are so deeply divided between the regions and nations that make up the UK. Using only interest rates to control the national economy was at the time likened to being a golfer with a choice of only one club in his bag.
One would hope that subsequent governments will not make the same mistake, but I wouldn't bank on it.
But we all know that interest rates are going to rise, and banks' margins between creditor interest and debtor interest are being maintained at very high levels so that high profits will rebuild their balance sheets.
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