As expected, on 5th May the Bank of England raised the base rate by 0.25 percentage points to 1%, taking it to its highest level since 2009. Although the move has generated plenty of column inches, its impact won’t be felt by everyone.
Only those people with variable-rate mortgages will see an immediate increase in their monthly mortgage repayments. This group accounts for only 19% of all borrowers – down from 72% a decade ago – so most people will be insulated for now because they are on fixed-rate loans. However, the Bank’s move will affect the 1m people whose fixed rate is set to come to an end this year, as well as those looking to take out a new mortgage.
Mortgage rates have already been increasing, with lower loan-to-value (LTV) deals, especially 60% LTVs, seeing the biggest rises – these borrowers are likely to be older homeowners who have already accrued substantial equity in their homes. Nevertheless, mortgage rates are still low by historic standards and some households will still be securing cheaper deals today than they could two or five years ago. Interestingly, rates on 10-year fixes have come down, which implies that markets think rates will fall again in a few years’ time. So too have rate on higher LTV deals.
Which areas will be most affected?
Hamptons has analysed the impact of a 0.25%, 0.50%, 1.25% and 2.25% rate rise for someone buying with a 20% deposit in every local authority in the country. As well as assessing the effect on a mortgaged purchase, we have also looked at the local authority as a whole to see how many people bought in cash in 2021. Areas with high proportions of mortgaged homeowners will be most affected, whereas those with large numbers of cash buyers will not be so exposed.
Across Great Britain as a whole, the 0.25% rate rise means borrowers will see their monthly mortgage payments increase by an average of 2%, or £27 a month. On the face of it, this is not much, although it does alter the amount of gross income needed in order to secure a loan. Nationally, it means lenders will require borrowers to have an average additional annual income of just over £1,000 in order to borrow the same amount.
However, with further rate rises likely over the coming months, repayments and gross annual income requirements increase further to service the additional interest within the same 25-year mortgage term. A further 1.00% rise to the base rate would push up average monthly payments by 17.1%, or £228, and increase the required household income from £39,466 (before last week’s rate rise) to £49,043. A 2.0% rate rise would increase payments by 26.5%, or £352, and raise the household income level requirement to £54,260.