Mortgage experts are warning borrowers to choose their next deal carefully to offer maximum protection against higher interest rates. Homeowners who take out a two-year fixed-rate contract may find that it is expiring at the worst possible time, as mortgage rates are about to top five percent.
The Bank of England is expected to hike interest rates for the seventh time tomorrow, a move that will add pressure to millions of borrowers.
Mortgage, credit card, personal loan and overdraft rates have already risen sharply this year as lenders pass higher base rates on to customers.
The policy rate is currently 1.75 percent but could rise to 2.50 percent depending on the decision of the BoE’s monetary policy committee.
Markets still believe a 0.75 percent rise tomorrow is the most likely scenario, which would be the biggest rise since 1989.
More hikes could follow in November and December, with traders betting interest rates will hit 3.75 percent by the end of the year as the BoE struggles to contain inflation.
The average two-year fixed-rate mortgage now costs 4.09 percent. According to Moneyfacts, this is the first time in nine years that it has exceeded four percent.
Interest rates on new mortgages are rising even faster than interest rates, so homeowners should brace for another big jump after tomorrow’s BoE decision.
This is a major concern as one in four borrowers say they will not be able to afford their mortgage if interest rates hit five percent.
Borrowers with adjustable rate mortgages or whose fixed rate contracts are due to expire in the next 12 to 18 months are the most concerned, according to research by removals company Anthony Ward Thomas.
Founder Anthony Ward Thomas said, “Throw in higher energy, fuel and food bills, it’s no surprise people are restless.”
Concerned homeowners should consider fixing their mortgage for longer than two years, as that means it could expire at even higher borrowing rates.
Chris Sykes, technical director at broker Private Finance, said that two-year fixed rates are usually cheaper than five-year fixed rates, but that’s not currently the case. “Today’s best-buy two-year fix costs just 0.07 percent more than the best five-year fix available amid money market volatility.”
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Barclays is currently offering a five-year, fixed-rate best-buy mortgage at a competitive rate of 3.49 percent. However, this is only available for loans with a loan to value (LTV) of up to 60 per cent and has a product fee of £999.
The rate rises to 4.20 percent for buyers who only have a five percent deposit and need to borrow up to 95 percent LTV. However, there is no product fee.
Personal loan rates are also rising, with the average APR on a five-year £7,500 loan now standing at 5.7 per cent, the highest since January 2016, according to Moneyfacts.
A year ago it was 4.4 percent.
Credit card tariffs are also increasing, although they are already well above the basic tariffs.
A year ago, with a bank rate of 0.1 percent, the average card APR was charging 26 percent. Since then it has risen to 29.6 percent.
The number of cards not charging interest on balance transfers and new purchases for an introductory period has also fallen as card issuers tighten.
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Moneyfacts finance expert Rachel Springall said rising interest rates threaten to worsen the cost of living crisis. “Consumers need to keep up with their repayments and switch to cheaper offers where possible.”
She urged borrowers to check their creditworthiness before applying for a mortgage, loan or credit card and to seek counseling if they are struggling with their debt.
Michael Hewson, chief market analyst at CMC Markets, said many analysts still expect a 0.75 percent hike tomorrow, but many borrowers could struggle even if the BoE rises just 0.5 percent.
“While rate hikes aim to fight inflation and the cost of living, they will hurt borrowers, particularly those without a fixed term.”
Walid Koudmani, chief market analyst at financial brokerage XTB, said the Bank of England faces a tough task as the pound falls to a 37-year low of just $1.135 against the US dollar.
“A balance needs to be found between managing inflation and supporting the currency without negatively impacting the broader economy.”