In March 2020, the Bank of England made the decision to reduce the Base Rate from 0.75% to 0.10% to shield the UK economy from the effects of Covid-19.
The historically low Base Rate remained at this level until December 2021, and if you were buying a property, or reviewing your existing mortgage during this period, you will have benefited from the lowest interest rates the UK has ever seen.
To the average person, this might have felt like the greatest decision the Bank of England has ever made. Many homeowners and renters will have had more disposable income than they’ve had in a long time, or ever. This allowed us to build savings…
or more likely, spend the money on new things like; car finance, garden furniture to sit on during lockdown, or a well-deserved holiday after lockdown, home improvements/extensions, or with the further incentive of reducing/waiving stamp duty, buy a new home!
Well, sadly this bubble has well and truly burst. This level of disposable income and spending power meant that demand for products and services severely outweighed the supply.
Supply chains which had already been significantly impacted globally by Covid. This, combined with the start of the war in Ukraine, has caused high inflation, which caused the cost of living crisis we’re experiencing in the UK.
Since December 2021, the Bank of England made the decision to start gradually increasing the Base Rate, in an attempt to combat high inflation. By controlling our disposable income with interest rates, this means we have less money to spend and therefore demand reduces and supply stabelises.
The gradual increases were not welcomed, but they were manageable. That was until Liz Truss announced her Autumn Mini Budget plans, which at the time, saw interest rates rocket overnight, due to the lack of confidence and certainty in the UK economy. However, in hindsight, it simply accelerated the need for increasing the Base Rate to tackle stubborn inflation, which was causing the cost of living to increase by more than 10% per year.
Why the Mortgage Ticking Time Bomb?
Well, we’ve already seen millions of people finish their historically low 2, and 3-year fixed rates in 2022 and 2023, and this has caused a lot of financial pressure on UK households. However, a further wave of households is still to follow, as in 2025 and 2026 there will be even more people finishing their historically low 5-year fixed rates.
UK inflation is still higher than targeted levels of 2%, and until this target is reached, it’s unlikely the Bank of England will reduce the Base Rate. At the start of 2024 and even in the spring budget, the government suggested that if inflation continues to fall at the rate it had been that we could start to see the Base Rate fall by June 2024, however, in recent weeks this prediction has been called into question, with mortgage lenders increasing interest rates.
So far this year, we’ve had countless conversations with clients whereby they are paying attention to the media and the predictions. In some cases, clients have been hesitant to select a new deal or arrange a remortgage because they believe rates will fall before their fixed rate ends. However, that’s proven not to be the case, towards the end of 2023 and the beginning of 2024 we saw lenders slashing their profit margins on fixed rates as they battled it out for new business.
After a wild few months of rate wars, lenders have consistently been increasing rates since March 2024.
The ideal time to review your mortgage is 6 months before your current deal expires, as lenders typically provide remortgage and product switch offers for up to 6 months. Arranging a remortgage or a product switch simply reserves the interest rate, its non-committal unless you complete on the mortgage. Therefore reserving a rate protects you from rate volatility but also enables you to change the rate if interest rates fall before your current rate has expired.
What can you do to prepare for higher interest rates?
Budget Planner
Every household should have a budget planner. It’s a key part of our advice journey when arranging your mortgage, but is something that you should keep and use to help stay above board. The cost of living has increased significantly over the last few years, which means your bills will be much higher than when you arranged your last mortgage, and now you have to contend with a higher interest rate as well.
Forecast your mortgage payments
Whether you’re 6 months away from your historically low fixed rate ending, or 18 months, you can prepare yourself for the increase by speaking to a mortgage adviser, or using an online mortgage payment calculator to get an idea of what your new mortgage costs could be.
As a starting point you could find out what interst rates your existing lender would be offering you today if your rate was ending. You can input these rates into a mortgage payment calculator based on your current balance and remaining mortgage term.
Apply this forecasted payment into your budget planner and start planning your expenditure around this. Is it comfortably affordable? Or do you need to make cutbacks?
Consider making overpayments
Based on your current mortgage payment and the forecasted mortgage payment, can you afford to make a monthly overpayment to the mortgage?
e.g. Current payment £750, forecasted payment £1000
Begin making a monthly overpayment of £250. This will lower your balance and reduce the amount of interest you pay on your mortgage.
Mortgage Review
We all have our unique set of circumstances. There will be households that are comfortable with their new outgoings and can either continue with their existing mortgage, or even lower their mortgage term to pay the mortgage off sooner.
However, there are also many households that may need make changes to their mortgage to help lower their outgoings. This could involve increasing your mortgage term, switching some or all of your mortgage to interest only, or even consolidating debt.
Refer to our Mortgage Review page for mortgage information: