How will interest rate changes affect my mortgage?

Recently, many mortgage owners have seen an increase in repayments as lenders have increased their interest rates. 

And this has left many with some very important questions, such as…

• How exactly do these rate changes affect mortgage owners? 
• Why are some repayments going up and not others? 
• And why are interest rates increasing?

Here’s everything you need to know… 

Why are interest rates increasing?

The interest rate increases are driven by changes to the Bank of England Base Rate. The Bank of England Base Rate is the interest rate lenders such as banks are charged when they borrow money. It, in turn, impacts the interest rate banks and other lenders charge. As the Base Rate changes, so will the interest on loans, credit cards and mortgages. But not all are affected in the same way. And in the case of mortgages, the type of mortgage will determine if and how your repayments are affected. 

What are your mortgage options?

Mortgages come in a wide range of options. There are buy-to-let mortgages, discounted mortgages, mortgages for first-time buyers, joint mortgages and many others. But when looking at interest rates, three types of mortgages need addressing; fixed-rate mortgages, variable-rate mortgages, and tracker mortgages. These three mortgage types each refer to a different way your interest rate is calculated. Therefore each is affected differently by interest rate changes. 

Fixed rate mortgage

If you have a fixed-rate mortgage, a change in interest rates won’t affect you immediately. Until your current payment term ends, the new interest rate won’t impact you. Your rate will remain the same until you look for a new deal at the end of your current payment term. 

Variable rate mortgage

Variable-rate mortgages are more likely to change in line with a change in the base rate. The interest on a variable-rate mortgage is set by the lender and may be linked to the base rate. If the interest rate your lender is charged increases, the interest on your mortgage will likely also go up. 

Tracker mortgage

The third kind of mortgage is a tracker mortgage. A tracker mortgage is directly connected to the base rate. This means your interest rate will rise as the base rate does, but you could also experience lower payments if the base rate decreases.

Why does the base rate change?

As we looked at above, the base rate influences mortgage interest rates. As the Bank of England increases the interest lenders are charged, lenders, in turn, increase the interest they charge. But this doesn’t answer why rates are going up. It simply moves the problem from mortgage lenders to the Bank of England. So what is actually going on?

The Bank of England adjusts the base rate with the aim of reducing inflation. As the base rate increases, borrowing becomes more expensive. And on the other side of the coin, you can earn more on your savings. This moves us away from spending and towards saving. As we spend less, the rate at which the price of goods and services rises tends to slow.

What does a base rate increase mean for your mortgage?

The topic of base rate, interest, inflation and their role and influence over mortgages is broad. There is a lot to know and the specifics are constantly changing. As the Bank of England works towards its inflation goals, the base rate will continue to change, creating knock-on effects like those we are experiencing now. 

However, the core takeaways are simple – fixed-rate mortgages remain unaffected by recent base rate increases. Variable rates and tracker mortgages, on the other hand, will see increases.