Interest Rates for Property Finance

There has been increasing speculation for quite some time, that the Bank of England will increase UK interest rates. Many financial analysts believe that the Bank is likely to raise its base rate from 0.5% to 0.75%, with a recent Reuters poll suggesting that 32 out of 47 economists believe it will increase soon, with rates potentially increasing again in the Autumn.

This was after the November 2017 announcement that saw the base rate increase for the first time in over a decade, rising from 0.25% to 0.5%. The base rate had previously been at an all-time historic low since August 2016. However, for all 9.2 million households in the UK who have mortgages, and therefore are subject to interest rates, it is important to consider what this all may actually mean in practice and reality.

There are various different types of interest rates available on the UK market on fixed rate, variable rate, tracker rate bases. This is in addition to ‘discount mortgages’ and others. Doing one’s research is therefore one of the key factors in acquiring the most favourable mortgage for your circumstances. It is therefore worth investigating both status and non-status lenders as potential lending options.

Crucial to consider, is what exactly the base rate refers to and how the UK base rate impacts the levels of interest paid by consumers on their specific type of property finance.

What is the Interest Base Rate?

This is the borrowing rate created by the Bank of England which stipulates the interest percentage that borrowers pay on mortgages, as well as what savers will earn on savings products. Changes that are made to this base rate are the result of Monetary Policy Committee (MPC) meetings, a group which is part of the Bank of England that meets regularly to discuss the base rate and whether changes need to be made.

The most recent change in November saw the rise in a large number of people’s mortgages, whilst savers saw improved returns on their savings. The base rate however has less of an impact on second charge mortgages and some specialised forms of property finance such as bridging finance or that for development as part of a larger portfolio.

How Much Interest Will I Pay on my Mortgage?

This largely depends on a number of factors. For example, the exact rate of interest will usually be determined by the mortgage lender. The amount this ultimately equates to will also be dependent upon the type of mortgage one has, which is likely to be one of the following:

  • A fixed rate mortgage - The interest rate remains the same for the duration of the mortgage
  • Tracker mortgage - The interest on the mortgage stays in line with the Bank of England base rate
  • Variable rate mortgages - The rate of interest on the mortgage fluctuates with a benchmark interest rate paid by the borrower

Around half of UK households with a mortgage have either a tracker rate or standard variable rate one, and generally, these mean that the borrower is more likely to have to pay a higher level of interest overall. Nevertheless, no matter the mortgage type, the bigger the deposit you can put down initially, the better the interest rate you will receive.

How Do Interest Rates Work for Fixed Rate Mortgages?

Almost all new mortgage loans in the UK (94%) are on fixed interest rate mortgages (source: BBC). These tend to last around two to five years and the interest rate paid is fixed for a predetermined period. This means that regardless of base rate fluctuations by the Bank of England or any other changing factors, the interest rate stays the same. However, it is important to remember that you may have to pay an early repayment or exit charge should you decide to exit the fixed rate deal early and this should be checked before committing to the agreement from the outset.

Across the UK, around 57% of homeowners are on fixed rate deals. Once this fixed rate period ends (depending on the mortgage provider in question this may last for up to ten years), the borrower will likely be moved onto a ‘standard variable rate’ mortgage. This is where increased base rates can lead to a higher interest rate.

Interest Rates for Variable Rate Mortgages

It is estimated that around 35% of homeowners in the UK are on variable rates. A variable-rate deal is when the lender is able to move the interest rate at their discretion. Variable mortgage rates mean that the interest amount can change at any time, which therefore does not give borrowers with these mortgages a huge degree of security in terms of what they can expect repayments to be each month.

Interest changes are generally based upon the Bank of England’s current base rate. For example, standard variable rate mortgages (SVR) tend to follow the base rate movements. SVRs can widely differ between mortgage lenders, with some only a few percentage points above the Bank of England’s base rates and others being higher. Typically, if there was to be another rise in the base rate, it is likely that those who have a variable rate mortgage will be some of the most affected.

How Do Interest Rates Work for Tracker Mortgages?

Also known as 'base-rate trackers' or 'bank-rate trackers,' these are directly linked to the Bank of England’s base rate and may therefore go up or down in accordance with it. As an example of an average tracker rate deal, if the base rate had been defined as 0.50%, the mortgage rate may be roughly 2.50% above it, making it ultimately payable at a rate of 3.00%.

Discount mortgages

Discount mortgages are another type of variable mortgage which is linked to the lender's standard variable rate (SVR). These mortgages will typically last for around two to five years, which means that if the SVR had been stipulated as 3.50% with a discount of 1%, the mortgage rate that would need to be paid would be 3.50%. It is important to note that SVR changes with discount mortgages are also at the lender's discretion. This could mean that even if the Bank of England base rate has not been altered, you could still find yourself having to make higher repayments.