How Much Will My Mortgage Go Up?

With mortgage rates rising throughout 2022 and most of 2023, many homeowners are wondering what this means for them.  One of the obvious concerns for homeowners is how much their mortgage payments will be and whether they can afford them, especially when interest rates are rising.  The interest rate on your mortgage is one of the biggest factors that affects your monthly payments.  This article is to get you up to speed on how this may impact you.

Do you have a Variable / Tracker mortgage?

Variable or tracker mortgages are directly impacted by interest rate hikes as their interest rates are linked to a benchmark rate, typically the Bank of England's base rate or the lender's standard variable rate (SVR). When the benchmark rate increases, the interest rate on variable or tracker mortgages will also rise accordingly.

Here's how interest rate hikes affect these types of mortgages:

Increased Monthly Payments:

As interest rates rise, the monthly payments on variable or tracker mortgages will increase. This is because the higher interest rate leads to a higher cost of borrowing, resulting in larger monthly repayments.

Affordability Challenges:

Higher monthly payments can create affordability challenges for borrowers, especially if they have stretched their finances to secure a larger mortgage based on lower initial interest rates. Some homeowners may struggle to manage the increased payments, potentially leading to financial difficulties or the need to adjust their budget.

Budgeting Uncertainty:

Variable rate mortgage or tracker mortgages offer flexibility in the short term, but they come with the risk of uncertainty. Interest rate hikes can make it difficult for borrowers to plan their long-term budgets accurately. Fluctuating mortgage payments can impact household finances, making it harder to predict monthly mortgage payments and manage future expenses.

Potential Negative Equity:

Interest rate hikes can slow down property price growth or even lead to a decline in property values. In such situations, borrowers with variable ror tracker mortgages may face the risk of negative equity. Negative equity occurs when the outstanding mortgage balance is higher than the current value of the property. This can restrict homeowners' ability to remortgage or sell their property without incurring financial losses.

Financial Planning:

Interest rate hikes highlight the importance of financial planning and stress testing mortgage affordability. Homeowners with variable or tracker mortgages should consider the potential impact of future rate increases and assess whether they would be able to manage higher mortgage payments. Seeking professional advice or utilizing online tools, such as mortgage affordability calculators, can help borrowers plan for different interest rate scenarios.

Reviewing Mortgage Options:

Interest rate hikes can prompt borrowers to review their mortgage options. Some homeowners may choose to switch to a fixed-rate mortgage to secure a stable interest rate and predictable monthly payments. Fixed-rate mortgages offer protection against future interest rate increases, providing peace of mind and greater financial stability.

Lender Communication:

During periods of interest rate hikes, lenders typically communicate with their customers, providing updates on how the rate changes will affect mortgage payments. Lenders may offer guidance or options to borrowers, such as discussing potential alternatives or reviewing affordability to ensure borrowers can manage the increased costs.

Do you have a Fixed mortgage?

In contrast, fixed-rate mortgages are not directly impacted by interest rate hikes during the fixed-rate period. When borrowers opt for a fixed-rate mortgage, they agree to a set interest rate for a specific period, typically ranging from two to five years. This means that regardless of any subsequent interest rate increases, the interest rate and monthly payments remain fixed for the agreed-upon term. Here's how fixed-rate mortgages are affected by interest rate hikes:

Stability and Predictability:

One of the key advantages of a fixed-rate mortgage is stability. Regardless of fluctuations in the broader interest rate market, borrowers with fixed-rate mortgages enjoy predictable monthly payments throughout the fixed term. Interest rate hikes during this period do not impact the mortgage interest rate or the monthly payment amount.

Protection Against Rising Rates:

Fixed-rate mortgages provide protection against future interest rate increases. Borrowers who anticipate rising interest rates may choose a fixed-rate mortgage to secure a stable interest rate, ensuring that their mortgage payments remain consistent even if rates go up.

Limited Impact on Budgeting:

With a fixed-rate mortgage, borrowers can accurately budget their monthly expenses over a fixed term. They don't have to worry about sudden increases in mortgage payments due to interest rate hikes, allowing for better financial planning and peace of mind.

Reduced Refinancing Motivation:

During periods of interest rate hikes, borrowers with fixed-rate mortgages may have less motivation to refinance their loans. Since their interest rate remains unaffected by market rate fluctuations, they can maintain the stability of their existing mortgage without the need to explore refinancing options.

Preparing for the End of the Fixed Term:

It's important for borrowers with fixed-rate mortgages to be aware that their fixed term will eventually expire. As the end of the fixed period approaches, they should consider future interest rate scenarios and review their options. At the end of the fixed term, borrowers may need to negotiate a new mortgage deal or explore refinancing options if interest rates have changed significantly.

Market Conditions for Refinancing:

If interest rates increase significantly during the fixed-rate term, borrowers may find that prevailing rates at the end of their term are higher than their existing rate. In such cases, refinancing to a new fixed-rate mortgage may result in higher monthly payments. It's essential to assess market conditions and consult with mortgage advisors to determine the best course of action.

Why is the Bank of England increasing interest rates?

The Bank of England is the central bank of the UK and it sets the base interest rate for the country. Changes in the base rate can have a significant impact on your mortgage payment.  One of the primary objectives of the BoE is to maintain price stability, which involves managing inflation. If the BoE believes that inflation is rising or is projected to exceed its target, it may increase interest rates to reduce consumer spending and borrowing, thereby curbing inflationary pressures.  This is the primary reason why the Bank of England has increased rates.  When the Bank of England increases interest rates, it raises the cost at which banks can borrow money from the central bank. In response, lenders increase their rates to maintain profitability and adjust for the higher cost of funding, leading to higher interest rates for borrowers on various financial products, including mortgages.

How a mortgage calculator can help?

If you want to estimate how much your mortgage payment could increase based on changes in interest rates, you can use a mortgage calculator. This tool can help you understand the potential impact of a rate increase on your monthly payment. By inputting your loan amount, term, and interest rate, you can see how much your payment may increase or decrease.

In conclusion, understanding how interest rates impact your mortgage payment is important for all homeowners. By keeping an eye on interest rates, using a mortgage calculator, and having a financial plan in place, you can prepare for potential rate increases and ensure that you can continue to afford your mortgage payments.