The Bank of England has raised its base rate four times since August 2006. Here's what could happen to mortgage rates if these hikes continue.
Although your personal finances may be in good shape today, who knows what the future will bring? For example, an unexpected rise in your expenses or a fall in your income (perhaps because of an accident, sickness or unemployment) could put your household budget under intense pressure.
Hence, it's my view that, when it comes to money management and thinking ahead, we should all hope for the best, but plan for the worst. This is particularly important if you are a homeowner with a large mortgage, because having a home loan means taking on a debt which usually lasts 25 years or more.
If you want to know exactly what your monthly mortgage repayments will be for the entire life of your home loan, then you could sign up to a 25-year fixed-rate deal. However, only a microscopic minority of mortgage borrowers do this, with most of us plumping for two-, three- or five-year fixed- or discounted-rate mortgages.
Alas, many borrowers suffer from 'payment shock' when their special-rate deal ends and they revert to paying their lender's standard variable rate. The standard variable rate, or SVR, is the bog-standard rate paid by all mortgage borrowers who aren't paying a special-rate deal. What's more, as the SVR is usually a lender's highest rate, it's well worth taking steps to ensure that you don't pay it for long, if at all.
Of course, no-one can predict the far-flung future direction of interest rates with any accuracy. However, since last August, the Bank of England has raised its base rate four times in order to bring inflation (rising prices) under control.
Naturally, when the Bank of England raises its base rate, mortgage lenders are quick to follow suit in order to preserve their profit margins. Here's a list of the changes to major lenders' standard variable rates since the base-rate hike earlier this month:
Lender | Previous | New | Add another | And another |
|---|---|---|---|---|
Abbey | 7.34 | 7.59 | 7.84 | 8.09 |
Alliance & Leicester | 7.39 | 7.64 | 7.89 | 8.14 |
Bank of Ireland | 7.34 | 7.59 | 7.84 | 8.09 |
Bank of Scotland | 7.50 | 7.85 | 8.10 | 8.35 |
Barclays/Woolwich | 7.39 | 7.64 | 7.89 | 8.14 |
Bradford & Bingley | 7.25 | 7.50 | 7.75 | 8.00 |
Bristol & West | 7.34 | 7.59 | 7.84 | 8.09 |
Britannia BS | 6.95 | 7.20 | 7.45 | 7.70 |
Cheltenham & Gloucester/Lloyds TSB | 7.25 | 7.50 | 7.75 | 8.00 |
Coventry BS | 7.34 | 7.59 | 7.84 | 8.09 |
Direct Line | 6.88 | 7.13 | 7.38 | 7.63 |
Egg | 6.24 | 6.49 | 6.74 | 6.99 |
First Active | 6.35 | 6.60 | 6.85 | 7.10 |
GMAC-RFC | 7.24 | 7.49 | 7.74 | 7.99 |
Halifax | 7.25 | 7.50 | 7.75 | 8.00 |
Intelligent Finance | 6.65 | 7.10 | 7.35 | 7.60 |
Leeds BS | 7.24 | 7.50 | 7.75 | 8.00 |
Nationwide BS | 6.74 | 6.99 | 7.24 | 7.49 |
Northern Rock | 7.34 | 7.59 | 7.84 | 8.09 |
One Account | 6.35 | 6.60 | 6.85 | 7.10 |
Portman BS | 7.24 | 7.49 | 7.74 | 7.99 |
Royal Bank of Scotland/NatWest | 7.44 | 7.69 | 7.94 | 8.19 |
Skipton BS | 6.64 | 6.89 | 7.14 | 7.39 |
Smile | 7.24 | 7.49 | 7.74 | 7.99 |
Standard Life Bank | 6.76 | 7.06 | 7.31 | 7.56 |
Source: Moneyfacts, 29/05/07
Currently, the Bank of England's base rate stands at 5.50% a year, although economists and other financial pundits expect it to rise at least once (and perhaps twice) in 2007. Thus, I've added two columns showing how high mortgages rates could be after further quarter-point hikes. As you can see, a half-point (0.50%) hike would take some SVRs to 8% a year or more (those which I've highlighted in bold type). Ouch -- that'll hit borrowers on SVRs and variable-rate deals pretty hard.
Nowadays, with mortgage and other debt hitting record highs each month, it's vital to make sure that you don't pay more interest that you need to. Rather than being shunted onto your lender's SVR or an equally unattractive rate, try the Fool's award-winning, no-fee mortgage service. If you don't fancy paying a mortgage rate of 8%+ a year, then switching to a great rate could throw your personal finances a lifeline!