Interest rate increases are being drip fed
Continued increases to the base rate by the Bank of England have made borrowers conscious of their product end dates.
Colin Bell, co-founder and chief operating officer of Perenna, spoke to borrowers’ concerns amidst rate hikes by the Bank. “The Bank of England’s decision to further increase interest rates to 1% will sound the alarm bells for borrowers who are on Standard Variable Rates (SVR) or approaching the end of their product term,” he said.
The bank’s Monetary Policy Committee (MPC) voted to increase the base rate to 1% at the beginning of May, representing the fourth consecutive increase and its highest level in 13 years.
Read more: Bank of England hikes rate to highest level in 13 years
According to Bell, in order to avoid large shocks, the interest rate rises are being drip fed, but he said this is starting to have an impact as it coincides with sizeable cost of living increases.
There is little doubt that these rises will negatively impact those with mortgages on an SVR and other variable debt, meaning they will need to pay more each month at a time when they are also having to combat rising expenses elsewhere.
As a result of inflation reaching its highest level in 40 years, combined with the war in Ukraine and the energy bill crisis, many are struggling across the country financially.
Bell said that lenders are now pulling mortgage products from the market, and average rates on two-year fixes recently reached seven-year highs.
“Consumers are now finding it harder than ever to get onto the property ladder,” he added.
As flexible long-term fixed rate mortgages are not impacted by interest rate rises, Bell believes they can provide a solution to the problem, allowing individuals to better manage their monthly outgoings.
Indeed, for prospective homebuyers, long-term fixed repayments offer peace of mind, especially during these periods of record inflation.
As such, Bell explained that it will be unsurprising if we witness increased numbers choosing to take protection from long-term deals as 2022 continues, now that we are seeing interest rate cycles that have not existed for over a decade.
“Many five-year fixes are currently priced at a lower rate than two-year deals,” said Conor Murphy, chief executive and founder of Smartr365. However, Murphy added that the wider circumstances of this do need to be taken into consideration.
He outlined that the past two years have reminded us of how fast personal and economic conditions can change, and some people will be put off by the thought of locking in for longer.
“Flexibility is an important factor for a lot of people, so they will have to weigh up whether they want to prioritise cheaper rates or the ability to swap more easily,” he added.
Read more: Households dipping into savings due to cost-of-living crisis, report finds
An estimated 17% of households in the UK have been unable to save during the last two years due to the pandemic.
Many experts within the industry are expecting economic conditions to worsen over the course of the year, as more people are forced to use their savings in order to combat the cost-of-living crisis.
Danny Belton, head of lender relationships at Legal & General Mortgage Club also believes the Bank of England's decision to increase the base rate, coupled with the financial pressure of the inflation crisis, is likely to prompt some borrowers to seek long-term fixed rate mortgages that offer a sense of security against further rate increases.
“Although a number of customers have already locked into new rates, pricing of longer-term fixed rates has become more competitive with more choice which may encourage more borrowers to act quickly to secure a deal that can help minimise their monthly outgoings,” he said.
Against these challenging market conditions, Belton outlined that the value of advice remains paramount.
He believes aspiring homeowners may be concerned by the news and could benefit from the support of an adviser to source a deal that suits their unique circumstances.
“This is an opportune moment for advisers to demonstrate their expertise and help both first-time buyers and those looking to remortgage to find the right solution for them,” he said.
