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Bank of England votes to raise interest rates, but how will you be affected?

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Written by: Hannah Baker | Posted 02 November 2017 12:30

Bank of England votes to raise interest rates, but how will you be affected?

 

The Bank of England has voted to increase interest rates from 0.25 per cent to 0.5 per cent - the first rate rise for a decade.

It might seem a small increase but could leave some Bristol homeowners unable to afford their mortgage repayments.

According to the Bank of England, 57 per cent of UK homeowners are on fixed-rate deals, while 43 per cent have tracker mortgages.

But how will the rise affect you? We take a look…

Tracker deals

Homeowners on tracker mortgages are likely to see repayments increase if there is a rate rise.

Nationwide has already announced it will pass on the rise to its 600,000 customers who have a variable-rate deal.

Based on the building society’s ‘base mortgage rate’ over 25 years, homeowners with a £175,000 mortgage would see £22 a month added to their repayment bill, or £51 a month if the mortgage is £400,000.

If rates increase to three per cent over time, as many are predicting, the average Nationwide-borrower (based on a £175,000 mortgage) could face monthly repayments of £1,023, which is £260 more every month than they would currently be paying.

Other lenders are also predicted to follow suit.

Read more: When is the Budget 2017?

Fixed-rate deals

Borrowers with fixed-rate deals may not be affected immediately.

However, many lenders will be off-setting the rise by changing the ‘revert to’ rate at the end of fixed-term deals.

For example, HSBC’s two-year fixed rate will revert to 3.69 per cent at the end of the term. But once the base rate rises, that ‘revert to’ rate will jump to 3.94 per cent.

So many homeowners, including first-time buyers, could see their repayments shoot up to unaffordable levels after the fixed term.

Check with your mortgage lender to find out exactly how much you could be paying when your fixed term ends.

Savers

Despite savers thinking a rise could give their bank accounts a healthy boost, Laith Khalaf, senior analyst at Bristol’s Hargreaves Lansdown, says it is likely to be a “hollow victory for cash savers”.

He explains an interest rate rise to 0.5 per cent would see the typical rate on a cash ISA rise from 0.8 per cent to 1.3 per cent.

He said: “Rising interest rates should be good for cash savers, though it’s hard to see much of a material impact for income seekers anytime soon.

“While that is a significant jump in relative terms, getting £13 annual interest on each £1,000 saved compared to £8 is unlikely to see consumers rushing to fill their boots.

"Rates on cash accounts probably won’t rise as quickly as they fell either; banks tend to make more profits when interest rates rise because they don’t pass on hikes as quickly to savers as they do to borrowers.”

 

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