Base rate rise squeezes mortgage borrowers further
Commenting on today’s decision by the Bank of England to increase the base rate by 0.25 percentage points to 5.25%, Sarah Pennells, consumer finance specialist at Royal London said:
"Given the recent news of lower inflation hard-pressed mortgage holders will be disappointed that the Bank of England didn’t leave the base rate untouched. With the speed at which interest rates had been rising, the higher repayment amounts, for some, will be unaffordable or a huge stretch on their finances.
"While those on a tracker rate have seen repeated mortgage rate rises since the end of 2021, the impact will be more keenly felt for those on fixed deals who are looking to remortgage. Rates were at historic lows on two-year fixes in summer 2021 and the majority of borrowers, whose deal is coming to an end in 2023 fixed at below two per cent, meaning they will be faced with considerably higher monthly mortgage payment amounts.
"Someone with a 25-year repayment mortgage with an average outstanding balance of £127,420 would be paying an extra £390 a month, based on the average two-year fixed rate mortgage today, compared to the average two years ago. That’s a massive £9,350 over the two-year term.
"If anyone is worried about their mortgage or struggling, they should contact their mortgage lender or mortgage adviser as soon as possible. There’s a range of measures in place to help mortgage customers, and the earlier you ask for help, the sooner you may be able to access the support."
"Royal London’s cost of living research conducted earlier this year** found that 30% of UK consumers were already moving into their overdraft or needing to borrow funds before the end of the month to make ends meet, so further increases in mortgage costs will be a huge concern for many hard-pressed borrowers.
"Although savings rates have been getting higher, they have not kept pace with the rises in the Bank of England base rate. Given the Financial Conduct Authority’s 14 point action plan announced this week, savers will be hoping that they will see much improved rates to the savings products on offer. With the potential for rates to get more competitive, it’s vital that savers shop around to see what options are available. Banks and building societies attract new customers with their best rates, so it could be worth moving your savings to another provider if it would earn more interest."
- If you’re nearing the end of your current fixed deal, you can start to look at your options and secure a new deal with a lender around six months in advance of the mortgage start date. If you’re concerned rates will continue to rise, it’s best to act as quickly as you can to put a new fixed rate deal in place and avoid moving on to a lender’s standard variable rate. Under the Mortgage Charter, most lenders have agreed that you will also be able to ask for a better like-for-like deal with your lender right up until your new term starts.
- Get in touch with your lender if you’re worried about being able to afford your mortgage. Contacting your mortgage lender in this way won’t have any impact on your credit file.
- It is much better to have the conversation with your lender early so they can look at available support options with you before you find yourself with any mortgage arrears. Contacting them before you miss payments, or as soon as you’re falling short on payments, means there may be more options available to you to help make your payments affordable.
- Mortgage lenders that have signed up to the Mortgage Charter have said customers who are up to date with their mortgage payments will be able to switch to interest-only payments for six months or extend their mortgage term to reduce their monthly payments. The lender won’t need to carry out an affordability check and it won’t affect the customer’s credit score. However, customers who want to go back to their original mortgage term will have to contact their lender within the six-month period.
- If you’re struggling with other household bills or you’ve received letters mentioning repossession, contact a free-to-use debt advice charity, such as StepChange, National Debtline or Citizens Advice, or the financial poverty charity, Turn2us, straight away.
- Savers should make sure that they’re making the most of their tax-free allowance by reviewing the rates offered on existing savings accounts. There can be more attractive options out there as providers tend to offer their highest interest rates on new customer accounts.
Notes to editor
*Calc: 25-year term mortgage with average UK outstanding amount of £127,420.
Repayment at current two year fixed average rate of 6.83% (£886.81pm) vs Repayment at average two year fixed rate at 75% LTV July 31 2021 of 1.29% (£497.12pm) = a difference of £389.569 per month
** Cost of living shock: average UK household pays £441 extra per month in bills - Royal London
Royal London commissioned a survey by Opinium between 27 February and 6 March 2023, with a sample of 4,000 nationally representative UK adults. This is the third wave of cost of living research Royal London has carried out (earlier waves were conducted in February and August 2022).
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About Royal London
Royal London is the largest mutual life, pensions and investment company in the UK, and in the top 25 mutuals globally, with assets under management of £153 billion, 8.6 million policies in force and over 4,100 employees. Figures quoted are as at 30 June 2023. Learn more at royallondon.com.
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