Costs of variable rate rise revealed

Costs of variable rate rise revealed

Online mortgage broker Trussle has calculated that borrowers on variable rate mortgages could collectively have to pay an extra £82.8m of mortgage payments in December, if the Bank of England’s Monetary Policy Committee (MPC) votes to raise the base rate by 0.25 percentage points.

If the Bank Rate rises on 2 November, lenders will likely pass the full increase onto their customers within a month, based on historical lender behaviour. The average variable rate borrower on a repayment loan would see their monthly payment rise by £16.56 – £82.8m across the UK. On an annual basis, these borrowers will see their mortgage payments increase by £198, or £990m across the country.

While most new home loans are on fixed rate terms, there are five million UK borrowers on variable rate products, which move up and down with the base interest rate set by the Bank of England. A borrower may be on a variable rate because they opted for one when securing their mortgage; a tracker rate, for example, is likely to have been extremely favourable over the last decade. They may also be on a variable rate because their initial fixed rate has lapsed onto their lender’s Standard Variable Rate (SVR). Three million people are currently in this position.

Those on a variable rate in London, where the average outstanding mortgage value is around £243,000, will be hit hardest by a rate rise. A London-based borrower with 20 years left on their mortgage, currently paying an interest rate of 2.25%, would see annual charges increase by £336.

The last time the base interest rate was changed was on the 4 August 2016, when the MPC cut rates from 0.5% to 0.25%, the first change in almost a decade. Of the lenders monitored in Trussle’s 2016 Lender League Table, 53% had dropped their rates in line with the Bank of England within a month of the rate change, including four of the six biggest lenders. In anticipation of a rate rise next month, more than 20 lenders have already raised their rates, several by a full 0.25 percentage points.

Effect of a 0.25 percentage point rise in base rate*

Mortgage balance Monthly increase Annual increase
£75,000 £9 £111
£100,000 £12 £148
£125,000 £15 £185
£150,000 £18 £221
£175,000 £22 £258
£200,000 £25 £295
£225,000 £28 £332
£250,000 £31 £369
£300,000 £38 £452
£350,000 £44 £527
£400,000 £50 £602
£450,000 £56 £677
£500,000 £63 £753


Ishaan Malhi, CEO and founder of Trussle, said: “It’s looking ever more likely that the Bank of England will raise interest rates, either in November or December. This will impact anyone on a variable rate mortgage. While the increase is only likely to be small at first, borrowers on variable rate deals should consider how they’ll cover the extra cost, especially those on a tight budget or with a large outstanding mortgage.

“With more rate rises potentially on the horizon, those nearing or beyond the end of their initial mortgage term should be thinking about switching to a more competitive deal. Because of the perceived complexity of getting a new mortgage, many people tend to this put this task off. As a result, a quarter of mortgage borrowers in the UK have ended up on their lender’s Standard Variable Rate, paying far too much interest. The process of switching has never been easier than it is now, so we urge borrowers to take action sooner rather than later.”