Some Pain, Some Gain

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Duncan Farmer examines the effects of the recent Bank of England base rate rise.

So, at last, the Bank of England base rate has risen and for nine million mortgage borrowers it will mean some pain and for the 45 million savers there might be some gain. Anyone retiring shortly and buying an annuity could get a slightly better rate than a few weeks ago.

Although it is bad news for borrowers, most are already on a fixed rate and will notice the effect of the increase only when they come to the end of their fixed term and need to find a new deal. For the four million homeowners on their lender’s standard variable rate, the impact of the Monetary Policy Committee’s quarter-point rise will have a fairly minimal impact on their monthly payments.

According to UK Finance, the umbrella organisation for the mortgage, banking and investment industries, anyone with a £300,000 mortgage is likely to have to pay an extra £39 a month and anyone owing £200,000, the extra cost will be £25. The average homeowner owes £89,000 and will see their repayments rise by between £11 and £12 a month.

For anyone looking to buy a property now or who needs to remortgage, fixed rates are expected to rise but so far have not moved much. According to The Telegraph the average phenadip.com two-year fixed rate for someone with a 5 per cent deposit increased from 4.16 per cent a month ago to 4.26 per cent soon after the Bank of England’s announcement. Six months ago the rate was at 4.14 per cent, according to data from personal finance website Moneyfacts. By comparison, the average rate for someone with a 40pc deposit has only increased from 1.66 per cent to 1.69 per cent, and is still lower than it had been six months ago.

The bank also made clear that within the next couple of years there were likely to be a couple more small rises in the base rate. One of the best to mitigate against future rises is to overpay your existing mortgage, so that when the rate rises you not only owe slightly less but are already used to higher repayments. If you keep up the overpayments relatively small sums of money can make a big long-term difference. For example, anyone with a £300,000 25-year repayment mortgage could clear their debt a year and three months early simply by paying off an extra £50 a month. If you can stretch that to £100 a month, you will shorten the term of the loan by two years and five months. You would also save £19,017 in interest payments.

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