Interest Rates - Up or Down?
December 1st, 2010
Why interest rates change
Mortgage interest rates are closely linked to the Bank of England base rate. This is set at the start of each month by the Bank of England's Monetary Policy Committee and they adjust the rate from time to time with a view to keeping inflation at a low and constant rate.
The Bank of England base rate has been reduced on 9 separate occasions since July 2009 when it stood at 5.75%. Since March 2009 the rate has been held at a low of 0.5%. We can only speculate as to what will happen next and when the next change will be. What we do know is that the rate cannot reduce much lower than it is now.
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How does this impact on mortgage payments?
Standard Variable Rate Mortgages
Mortgage lenders' standard variable rates are generally higher than the base rate by one or two percent. So, for example, if the base rate was 2%, most standard variable rates would be between 3% and 4%. If the base rate increases, your mortgage rate, if on the standard variable rate, is likely to increase as well. Currently bank base rates are low so people on SVR rates are enjoying low mortgage rates but carry the risk of future increases.
Fixed rate mortgages
Fixed rate mortgages are ideal for those, perhaps on a budget, who want to pay a fixed amount every month for an agreed period of time usually between 2 and 5 years. They are also ideal for people who are worried about interest rates increasing and the effect this would have on a variable interest mortgage payment. The fixed rate can be an advantage if the base rate rises but a disadvantage if the base rate falls. Generally, fixed rate mortgages have been the most popular option for homebuyers who see the main benefit as the certainty of no unpleasant increases.
Discounted rate mortgages
A discounted rate is a set discount, say 1%, compared with the mortgage lender's standard variable rate. So if the base rate moves, your discount rate is likely to move as well. These mortgages are therefore impacted both positively and negatively by base rate changes.
Tracker rate mortgages
Although mortgage rates tend to move when the base rate does, there is no exact link between the two. Lenders decide if and when they pass on interest rate cuts or interest rate rises. This has led to the invention of the tracker mortgage. These are variable-rate mortgages, but ones which are linked directly to the base rate. For example, a tracker mortgage could offer the base rate plus one per cent.
If you are concerned that you may be on the wrong type of mortgage and therefore are vulnerable to an interest rate increase then please click on the ‘Speak to an adviser’ button for direct advice or the ‘checkmymortgage’ button to benefit from our free mortgage check.