How does the current interest rate impact those buying a property?

Interest rates not only impact house buyers and homeowners but also those that have savings and investments. But if you’re unfamiliar with what they are and how they impact everyday living let us take you through our guide to find out more.

What are interest rates?

As outlined by the Bank of England, an interest rate tells you how high the cost of borrowing is, or how high the rewards are for saving.

So, if you are a borrower, the interest rate is the amount you are charged for borrowing money, shown as a percentage of the total amount of the loan. The higher the percentage, the more you must pay back, for a loan of a given size.

If you are a saver, the savings rate tells you how much money will be paid into your account, as a percentage of your savings. The higher the savings rate, the more will be paid into your account for a given sized deposit.

Even a slight change in interest rates can have an enormous impact. It is important to keep an eye on whether they rise, fall, or stay the same.

The term ‘bank rate’ is the UK’s interest rate set by the Bank of England that then influences the interest rate offered by high street lenders and building societies.

Why are there different interest rates?

While there is only one interest rate set by the Bank of England, the actual rates for various products offered for saving and borrowing by banks and building societies are dependent on other factors.

For example, if you were to take out a loan the lender must consider other factors such as the risk of the loan not being paid back. The bigger the risk the more interest they are likely to charge. The length of time you want to borrow the money will also be considered.

How do interest rates affect buying a property?

Those looking to buy a property by taking out a mortgage loan will be directly impacted by interest rates. First – depending on the size of your deposit – the higher the loan-to-value (LTV) of your mortgage the more chance of you paying a higher interest rate on your monthly mortgage payments.

According to a recent BBC article, approximately 74% of homeowners are on a fixed rate mortgage. A fixed rate mortgage is when a homeowner chooses a mortgage product that has a fixed rate of 1, 2, 3, 5 or more years. When the fixed rate promotion ends the mortgage then switches to the lenders’ standard variable rate which is typically a lot more than the fixed rate. At this point, homeowners often look to remortgage by taking out a new fixed rate deal that is more favourable than the standard variable rate.

The important thing to remember when taking out a mortgage, as with any other financial product, is that interest rates can go up and down.

At the point of writing this – interest rates have been historically low; however, they have been increased by the Bank of England’s Monetary Policy Committee (MPC) at the last five meetings. Therefore, anyone that has secured a low-interest mortgage will more than likely end up paying higher interest rates on their mortgage when it reaches the end of its fixed term.

If you have a tracker mortgage or are on the standard variable rate already, you will see the effects of the Bank rate increase immediately.

Why are interest rates on the rise?

Currently, the UK’s rate of inflation is at its highest level in decades. It was recently reported by the Office for National Statistics that the Consumer Prices Index (CPI) rose by 9.0% in the 12 months to April 2022, up from 7.0% in March. This is the highest CPI 12-month inflation rate in the National Statistics series, which began in January 1997. It is also the highest recorded rate in the constructed historical series, which began in January 1989., as household budgets come under intense pressure.

The current cost of living is being challenged by several economic factors:

The energy price cap rise

  • On February 3rd, 2022, the UK’s energy price cap increased by a staggering 54%. According to Ofgem, this new cap will see those on default tariffs paying by direct debit have an increase to household bills of £693 from £1,277 to £1,971 per year. With a further increase anticipated in October, many households are expected to feel a real impact on their everyday cost of living.

Increased national insurance payments from April

  • Announced by the government in 2021, from 6 April 2022 to 5 April 2023 National Insurance contributions have increased by 1.25%. This will be spent on the NHS, health, and social care in the UK.

Food and petrol prices have also both increased meaning shoppers are having to pay more for essentials.

Unfortunately, it is first-time buyers that are being challenged most by rising interest rates. With UK house prices still at an all-time high – those that are fortunate enough to be able to put a deposit towards the purchase of a property now face paying higher monthly mortgage repayments – coupled with the other cost of living crisis factors it is an extremely testing time for middle to low-income earners.

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