4 things you need to know about mortgages & interest rates

House prices have long held the property headlines but making a late charge for column inches of late are interest rates and their effect on mortgages. December 2021 was a busy month for the Bank of England, whose actions and intentions will shape the year ahead for property buyers.

Here are four key take-aways from the most recent announcements:-

1. The interest rate has risen: it has taken the Bank of England three years to start raising the interest rate from its historic low of 0.10%. As of December 2021, the interest rate is 0.25% – still a very low rate and a return to the figure we last saw in March 2020. The mortgage market, however, remains fiercely competitive and lenders continue to offer attractive rates on home loans in a bid to win borrowers’ business.

2. Most borrowers are unaffected: mortgage rate volatility in the past has encouraged more borrowers to take out fixed rate home loans. As a result, UK Finance estimates that 74% of all current mortgages are fixed and enjoy a rate that doesn’t budge, despite what the Bank of England does. Borrowers should, however, pay attention to when their fixed-rate period ends. Many lenders have already increased their standard variable rate – the rate you’re automatically switched to if you take no action at the end of a fixed-rate period – in light of the Bank of England’s decision.

3. Long-term mortgages are on the rise: coming at a time when more property buyers will be looking for long-term repayment security, another 40-year fixed-rate mortgage has launched in the home loan market. While borrowers need to check details – such as any early repayment charges, the set interest rate and the ability to ‘port’ the mortgage to a different property – fixing for four decades allows people to borrow greater sums of money, with a repayment figure that stays the same, even if interest rates rise.

4. Affordability checks may be eased: before the Bank of England decided to raise the interest rate, it had floated the idea of easing mortgage affordability checks. This tests the borrower’s ability to keep paying the mortgage after any fixed-rate period ends and interest rates rise by 3%. It is thought the 3% benchmark may be revised downwards, making it easier for more people to borrow money. It’s a case of ‘watch this space’, with further details expected.

Whether you are taking out your first ever mortgage, need to borrow more to fund your next move, want to purchase a buy-to-let or are thinking of freeing equity by remortgaging, we urge you to take independent financial advice.