Home Property Finance & InvestmentMortgages Revealed: the real cost of a predicted interest rate rise for large borrowers

Revealed: the real cost of a predicted interest rate rise for large borrowers

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25th Oct 17 2:57 pm

As Mark Carney confirms that UK interest rates will rise ‘in the coming months

Rising inflation and comments from the governor of the Bank of England have led markets to pencil in next month for the first increase in the cost of borrowing for more than nine years. One in 14 borrowers has a mortgage of more than £500,000 and a rise in interest rates will significantly impact their day-to-day finances.

CEO of broker largemortgageloans.com Paul Welch says: “It’s incorrect to think that people with larger mortgage loans are the super-rich who can easily service increased mortgage payments. There are thousands of borrowers in this category for whom a rise in interest rates will have a significant effect.”

The final quarter of 2017 has already seen some of the largest mortgage lenders in the UK, including Barclays, NatWest, Nationwide, Halifax and a handful of other banks and building societies, raise interest rates.

Welch continues, “We’ve been advising clients to get their mortgages in order for several months as we fully expect to see an increase in November. If it doesn’t come as soon as expected, it’s only a matter of time as it’s unrealistic for the rate to stay this low for much longer. Time is tight before the beginning of November, but there’s still a window of opportunity to review your options if you act now.”

According to figures released by the Bank of England, 43 per cent of homeowners are on a variable or tracker rate mortgage. To illustrate the very real effect of potential rate rises, largemortgageloans has created an illustration of what the annual increase in payments might be on a capital repayment 20 year mortgage with a 0.25 per cent increase:

Mortgage Monthly increase in payments Annual increase in payments
£100,000 £10.72 £128.64
£200,000 £21.44 £257.28
£300,000 £32.16 £385.92
£400,000 £42.89 £514.68
£500,000 £53.62 £643.44
£750,000 £80.40 £964.80
£1,000,000 £107.20 £1,286.40
£1,250,000 £134.00 £1,608.00
£1,500,000 £160.81 £1,929.72
£2,000,000 £214.41 £2,572.92
£2,500,000 £268.01 £3,216.12
£3,000,000 £321.61 £3,859.32

On an interest only basis, borrowers can expect to pay the following:

Mortgage Monthly increase in payments Annual increase in payments
£100,000 £20.83 £250.00
£200,000 £41.67 £500.00
£300,000 £62.50 £750.00
£400,000 £83.33 £1,000.00
£500,000 £104.17 £1,250.00
£750,000 £156.25 £1,875.00
£1,000,000 £208.33 £2,500.00
£1,250,000 £260.42 £3,125.00
£1,500,000 £312.50 £3,750.00
£2,000,000 £416.67 £5,000.00
£2,500,000 £520.83 £6,250.00
£3,000,000 £625.00 £7,500.00

For the 57 per cent of homeowners on fixed rate products, the impact of a base rate rise will not have such an immediate impact.  However, in the longer term, when the initial period of their mortgage comes to an end they will eventually have to face higher rates. Mark Carney has indicated rises in the UK would be “gradual” and that the UK could see a pattern like the US. Welch advises, “If you look to the US market, the Federal Reserve rate spent 7 years at 0.25 per cent before rising to 0.5 per cent in 2015. Since then it’s crept up; one year later to 0.75 per cent, three months later to 1 per cent and again three months later to 1.25 per cent”

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