What will happen to my mortgage if interest rates rise again?

Ned Browne

When the Bank of England lowered interest rates to a historic low of 0.5 per cent in 2009, few would have predicted they would be even lower eight and a half years later.  But commentators are in increasing agreement that they will rise from their current rate of 0.25 per cent, and soon…

Why interest rates may rise

Currently, the economy is a very mixed bag. Unemployment is very low and the devaluation of the pound has created “imported” inflation—this would suggest a rate rise would be economically prudent.

Yet economic growth is sluggish and productivity levels have stagnated for the last seven years. This encourages the doves, who think interest rates should stay the same.

On balance, most commentators think the most likely move would be to reverse the rather knee-jerk post-Brexit interest rate cut. That would put interest rates back up to 0.5 per cent.

Read more: Interest Rate Rise—What Homeowners Can Do Now to Get Ready

 

Good for savers?

Inflation has far outstripped interest payments for many years. So, in effect, anyone with money in the bank has seen the value of that money fall. This has been a long-standing complaint levelled at the Bank of England’s low-interest rate policy.

But, even if rates were to rise by 1 per cent over the next 12 months (and that’s well above the level economists are predicting), it’s unlikely banks would pass on that full rise to customers. And, even if they did, 1 per cent on £10,000 of savings would earn you just £8.33 a month before tax.

 

Bad for borrowers?

Typically people’s mortgage borrowings are higher than their savings, so looking at the economy as a whole, low-interest rates should stimulate more economic growth. 

On an individual level, rate rises will affect everyone with a mortgage. The amount it affects you will depend on how easily you can currently meet your mortgage payments.

 

How to protect yourself

If you are concerned about the impact of future rate rises you should get your mortgage fixed for a long as possible, taking into account possible future changes in circumstances. The mortgages available change on a daily basis—use a broker to find the best deals.

You should also consider making overpayments every month. Almost all mortgages allow this, and you should not underestimate the value of compound interest. For example, if you overpaid to the extent that your interest payments reduced by just £3 a month you would save £5,490 in interest payments over the next five years (or £21,780 over the next 10 years).

 

Lessons from history

Many of you will remember (or will have heard of) the interest rate hell of the early 1990s. 

The government was struggling to control inflation and it’s reckoned that two million people fell into negative equity. In 1991 there were 75,000 mortgage repossessions—interest rates went from 8 per cent to 13 per cent in six months.

Could this happen again? In the near term (let’s say the next 20 years) this is highly unlikely. But, stranger things have happened…