The Bank of England's base rate rose on Thursday, prompting mortgage lenders to raise their interest rates.
As you're probably aware, the Monetary Policy Committee of the Bank of England raised the base rate from 5.25% to 5.50% a year on Thursday. While this is good news for savers and is of no concern to people with modest or no debts, it's bad news for the majority of mortgage borrowers.
Of course, not all of the UK's 11.7 million mortgage borrowers face higher interest rates as a result of base-rate hikes. In particular, almost half of all mortgage borrowers are on fixed-rate deals, so their monthly repayments aren't effected by the latest rate hike. However, figures from the Council of Mortgage Lenders (CML) suggest that around six million homeowners have variable-rate mortgages, so these people need to brace themselves for higher monthly repayments.
If you have a tracker mortgage (where the interest rate you pay is directly linked to the base rate, for example, base rate+0.5%), then your monthly repayments may go up immediately or early next month. However, if you're paying your lender's standard variable rate (the SVR is the rate paid by all borrowers who don't have a special-rate deal), then watch out for an announcement from your lender informing you of its new SVR. The same advice applies if you have a discounted variable-rate mortgage, where the rate you pay is less than, but linked to, your lender's SVR.
There are well over a hundred different mortgage lenders in the UK -- trade association the CML has 162 members, made up of banks, building societies and other lenders. However, they tend to react in the same time-honoured way when the base rate goes up. In short, they aim to raise their lending rates by as much as they can and as quickly as possible in order to preserve their margins. Already, these three lenders have already unveiled higher standard variable rates:
Lender | Previous rate (%) | New rate (%) | Takes effect on |
|---|---|---|---|
Nationwide BS | 6.74 | 6.99 | 1 June |
Portman BS | 7.24 | 7.49 | 1 June |
Royal Bank of Scotland One Account | 6.70 | 6.95 | Immediately |
As you can see, each of these lenders has passed on the full quarter-point increase to its borrowers -- and we can expect most major lenders to follow suit. Thus, I can see SVRs rising to 7.50% at the Halifax, 7.59% at the Abbey and 7.64% at the Woolwich (three of the UK's biggest mortgage lenders). What's more, if the base rate goes up by another quarter-point, we may soon see the return of the 8% standard variable rate -- something almost unseen since the turn of the century.
Finally, it's worth noting that mortgage lenders often use changes in the base rate to fatten their profits by improving their margins. For example, in 1989, when the base rate hit 15% a year, the typical SVR was around 15.4%. In other words, most lenders got by on the slimmest of lending margins: just 0.4% about the base rate. These days, mortgage lenders are milking loyal borrowers by charging SVRs around 2% above the base rate, the profits of which then help to fund attractive deals to new borrowers. So much for rewarding loyal customers!
Thus, when it comes to mortgages, loyalty is for dogs and it pays to shop around. We recommend trying the Motley Fool's mortgage service, which searches the entire market to find the best home loan to suit your needs. What's more, our no-fee service won the award for "Best Mortgage Site of the Year" at the Online Finance Awards 2006, so we rather like it.
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