What would a rate rise mean for you?

Expectations of a base rate rise in May were dampened following comments from the Bank of England governor Mark Carney, but it’s still vital for homeowners to consider the impact of higher rates.

Talking to the BBC at the International Monetary Fund meeting, Mr Carney said that he was “conscious that there were other meetings over the course of this year”, suggesting that there’s no big rush to raise rates. Several economists revised their forecasts after his remarks, with some now predicting an increase could come later in the year rather than May.

The last time the base rate went up was in November last year, when the MPC raised it by quarter of a percent to 0.5%, the first increase in rates for a decade.

No-one knows for certain what will happen next month, but it pays to be prepared for every eventuality. Here, we explain what a base rate rise could mean for you, depending on what kind of mortgage you have.

Tracker mortgages

Those who are on tracker mortgages, which follow movements in the Bank of England base rate, will see their mortgage payments automatically increase if there’s a rate rise in May. Changes usually come into effect the month after any rate change, which would mean higher payments from June onwards.

Standard variable rates

If you’re on a standard variable rate, it’s up to your lender to decide whether to pass on some or all of any base rate increase, although most lenders do typically raise their SVRs by the same amount the base rate has risen. Following November’s rate increase, for example, the average SVR rose from around 4.5% to 4.75%.

If rates do increase again in May and the average SVR goes up to 5%, this would add nearly £22 a month or more than £260 a year to the cost of a £150,000 25-year repayment mortgage, with monthly payments going up from £855 to £877.

Our handy interest rate calculator shows you exactly how much extra you’ll have to pay if rates rise. Borrowers should shop around rather than staying on their lender’s SVR, as these rates are typically much higher than other mortgage rates.

Fixed rate mortgages

Anyone who’s currently locked into a fixed rate mortgage won’t see any change in their monthly payments if there is a rate rise. However, even though there won’t be any immediate effect, it’s important to consider that rates could be higher when the current deal finishes.

Fixed rates have already been edging up over the last few weeks in anticipation of a rate rise, so if you’ve spotted a deal you like, don’t hang around. Longer term fixes are proving popular at the moment as people seek to protect themselves against any more fluctuations over the next few years. The Bank of England indicated earlier this year that rates may need to rise earlier and “by a somewhat greater extent” than they previously thought.

If you are considering a long-term fix, say over five, seven or 10 years, check whether the deal is portable in case your circumstances change and you need to move. Bear in mind too that even if a deal is portable, you will have to meet the lender’s affordability criteria at the time you move before they’ll agree to transfer your mortgage to a new property.

Landlords

Landlords have seen a raft of changes recently which have added to their costs, making it even more important to review mortgage options and keep monthly payments to a minimum.

Not only must landlords pay a 3% stamp duty surcharge when they buy a new property to add to their portfolio, but the amount of tax relief on mortgage interest for higher and additional rate taxpayers has also been scaled back, with further reductions to come.

Many landlords on variable buy-to-let mortgage deals have already locked into fixed rate mortgages to prevent any further increases in costs if rates do rise, with remortgage activity expected to remain strong in the run up to May’s rate decision.