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The announced rise in the Bank Rate of 0.15 percentage points to 0.25 per cent from the Bank of England today may leave consumers speculating how this increase will affect their most significant outstanding loan: their mortgage. With the average homeowner having approximately £140,000 of their mortgage outstanding as of June 2021, it is important to understand who will most likely be affected by this news and by how much.
How the Bank Rate affects mortgage rates
Chart 1: Relationship between the Bank Rate and mortgage rates
Source: Bank of England
As shown in Chart 1 above, recent history tells us mortgage rates have declined gradually to near-record lows while the Bank Rate has remained largely static. For the few modest increases in Bank Rate over 2017 and 2018, mortgage rates did not rise by the same margin and returned to their gradual downward trend shortly after. Strong market competition and ready supply of wholesale funding have been important drivers in keeping rates low.
This rise in the Bank Rate is the smallest since 1989, so even if mortgage rates move more in line with Bank Rate than has been the case in recent years, the effect on mortgage rates will be commensurately modest.
Who might be affected by this change?
Chart 2: Proportion of new homeowner mortgages taken out on a fixed rate
Source: UK Finance
For most mortgage borrowers, the change in the Bank Rate will have no effect on their mortgage rate in the short term. Currently, 74 per cent of homeowner mortgages are on a fixed rate contract, with 96 per cent of new borrowers choosing this option since 2019 (as shown in Chart 2). Therefore, a sizeable majority of borrowers will see no immediate increase in their monthly repayments.
Furthermore, the proportion of fixed rate mortgage borrowers opting for five-year fixed rates has increased significantly in recent years, from fewer than three in ten borrowers in 2017 to around 45 per cent of borrowers in 2021. The proportion of those on two-year fixed rates has seen a decrease of a similar magnitude over the same period, suggesting an increasing number of borrowers have been ?locking in for longer? to take advantage of the near-record low rates. Hence, a sizeable proportion of borrowers are likely to see no change in rates and therefore monthly repayments in the medium term.
The Bank of England's announcement will most likely affect mortgage borrowers who have variable rate mortgages. Approximately 850,000 mortgage borrowers have a tracker rate mortgage currently: UK Finance estimates that a rise in the Bank Rate of 0.15 percentage points will lead to an average increase in repayments by £15.45 per month. For those who are on a standard variable rate (SVR) ? approximately 1.1 million mortgage borrowers - this rise translates to an estimated increase of £9.58 per month on average.
Conclusion
Mortgage rates have continued to decline in recent years despite little movement in the Bank Rate, in large part due to continued thriving competition in the mortgage market.
The rise in the Bank Rate to 0.25 per cent will not affect nearly three quarters of all mortgage borrowers in the short term, and this will extend into the medium term for the significant volume of borrowers locked into longer term fixed rate products. While approximately two million borrowers on variable rates will see their monthly mortgage payments increase in the short term, these increases are likely to be very modest with rates expected to remain historically low overall.
16.12.21
Charlie Cornes, Analyst, Data & Research, UK Finance
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