The Bank of England policymakers voted unanimously to keep interest rates February 2016 on hold at 0.5%. The decision was based on recent sharp sell-off in global stock markets and investors’ worries about a slowdown in China. In recent meetings policymaker Ian McCafferty had been arguing for a small rate rise but he has dropped that call in the light of the current economic climate.
Pundits had been expecting an interest rate this month as the US central bank, the Federal Reserve, recently raised official interest rates from their post-crisis low last month, the first rise in nearly a decade. Historically, the UK tends to follow close behind. British households, with their record unsecured borrowing and sizeable mortgages, are more vulnerable to rate rises than US mortgage holders. Some economists think that a small interest rate rise may actually benefit the overall economy on the UK, but with the average mortgage charging interest of just 3.07%, even a rise of 0.25 percentage points would hurt. It would mean the amount needed to pay interest on the typical mortgage would rise by 8%.
About mortgages and interest rates in February 2016
The base interest rate is an important figure that affects your monthly repayments. Your mortgage lender uses it as a starting point for your mortgage rate.
Mortgages fall into two main categories:
- Fixed rate – the interest you’re charged stays the same for a number of years, typically between two to five years
- Variable rate – the interest you pay can change
With Fixed Rate mortgages the interest rate you pay will stay the same throughout the length of the deal no matter what happens to interest rates. You’ll see them advertised as ‘two-year fix’ or ‘five-year fix’, for example, along with the interest rate charged for that period. The pros are mostly peace of mind that your monthly payments will stay the same, helping you to budget. The cons are fixed rate deals are usually slightly higher than variable rate mortgages and you don’t get the benefit of interest rate falls.
Types of variable rate mortgage
With variable rate mortgages there are more types available:
Standard variable rate (SVR)
This is the normal interest rate your mortgage lender charges homebuyers and it will last as long as your mortgage or until you take out another mortgage deal. Changes in the interest rate may occur after a rise or fall in the base rate set by the Bank of England.
This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years. But it pays to shop around. SVRs differ across lenders, so don’t assume that the bigger the discount, the lower the interest rate.
Tracker mortgages move directly in line with another interest rate – normally the Bank of England’s base rate plus a few percent. So if the base rate goes up by 0.5%, your rate will go up by the same amount.
Capped rate mortgages
Your rate moves in line normally with the lender’s SVR. But the cap means the rate can’t rise above a certain level.
These work by linking your savings and current account to your mortgage so that you only pay interest on the difference. You still repay your mortgage every month as usual, but your savings act as an overpayment which helps to clear your mortgage early.
Get in touch with us on 02476 592929 or use our enquiry form and we can help put you in touch with mortgage experts. Also you use our mortgage calculator to get an approximate idea of your monthly repayments.