Despite the fact that interest rates were kept on hold at 0.75% this month, the Bank of England has warned that rate increases could be “more frequent” if the economy picks up.
The Bank has kept the base rate at 0.75% since August last year, with limited pressure to raise rates given steady inflation and growth figures. Markets are currently predicting just one interest rate rise by 2021.
However, Mark Carney, governor of the Bank of England, has warned that if there is clarity on Brexit and the transition to new trading arrangements go smoothly, with growth and inflation both picking up, more increases may be likely.
Speaking at a news conference, Mr Carney said; "If something broadly like this forecast comes to pass... it will require interest rate increases over that period and it will require more, and more frequent interest rate increases, than the market currently expects."
Impact of rising rates
If rate rises do become more frequent in the months to come than is currently anticipated, homeowners on variable or tracker rate deals will see their monthly payments increase.
Even a quarter percentage point increase could make a significant financial difference, so it makes sense to consider how you’d cope with steeper payments.
For example, someone with a £200,000 repayment mortgage over 25 years, on a typical standard variable rate of 4.5%, would see their monthly payments rise from £1,112 to £1,140 if rates rose by a quarter percent and their lender passed this increase on in full.
Based on a higher SVR of 4.75%, the same mortgage would cost them £336 more a year.
Remortgage for greater certainty
If you think you’d struggle to cope with steeper costs and aren’t tied to your existing deal, you may want to think about locking into a fixed rate mortgage sooner rather than later, so that your payments won’t change even if interest rates do.
The good news is that there are currently plenty of great mortgage deals to choose from, with several five-year fixed rates available at well below 2%.
Many deals also come with tempting incentives such as free legal fees or cashback, which can help towards moving costs.
Even if your current deal isn’t due to finish for another few months, you might want to consider securing your next mortgage now, as many remortgage offers are valid for between three and six months from the date they’re issued.
Are you ready for higher interest rates?