How will rising interest rates impact homeowners? It’s not case of if, but when

By Laura Howard, finance expert at Forbes Advisor.

Interest rates have been hiked up by the Bank of England three times in the last four months, which marks the fastest rise in rates for more than a decade. The Bank rate now stands at 0.75%, up from 0.1% at the start of December.

What’s more, further hikes are in store as the Bank attempts to counter soaring inflation. The Consumer Prices index (CPI) surged ahead to 6.2% in the 12 months to February 2022, marking its highest level in 30 years. And there are indications that CPI could reach as high as 8% later this spring, when regulator Ofgem’s energy price cap rises by 54%, resulting in more expensive energy bills for millions of UK households. But what do the hikes in interest rates mean for homeowners?

The answer to this question is less about if their mortgage costs will rise, and more about when.

For example, for those on their lender’s standard variable rate (SVR), or on any mortgage deal that’s linked to the Bank rate, each interest rate rise will have an almost immediate impact on the cost of monthly payments. The most recent rise of 0.25% on a £200,000 mortgage priced at a variable 2.25% for example, will see around £25 a month (or £300 a year) added onto a borrower’s repayments.

When piled onto the other rising household costs, which include energy bills and even Netflix subscriptions, it’s going to make for a cash-strapped spring, summer and remainder of 2022 for many. First-time buyers and those looking to re-mortgage are likely to find that interest rate rises have already been factored into the cost of new mortgages. And while homeowners who are part-way through a fixed-rate deal will be sheltered from rises for now, when the agreed term ends, they are likely to land in an environment where new mortgage deals are considerably more expensive.

On a positive note, many lenders allow you to book your next mortgage deal between three and six months in advance. In other words, this means you can effectively freeze the rates that are available now and take advantage of them when it’s time to look for another deal.

According to Trussle, our mortgage partner, an increasing number of homeowners are now opting for longer-term fixed mortgages in a ‘bid for stability’. It said the initial term length for new fixed rate mortgages being taken by customers has gone up by 17%.

Separately, Santander has revealed that 55% of its new customers took out 5-year fixed-rate deals last year, up from 20% in 2016.

There is nothing homeowners can do about interest rate rises, or the cost-of-living crisis, which is tightening its grip with every month. We are also left with little choice but to power our homes, fill up our cars with fuel, and do the weekly food shop – all costs which have soared in recent months.

But it’s still worth investigating if there are any unnecessary expenses that could be cut back on to compensate at least in part. Examples could include paying interest on credit card debt when you could transfer it to a 0% balance transfer deal or forking out for services or subscriptions that you don’t use, such as your broadband and TV deal. It’s also worth making sure you are taking advantage of all potential savings, from government-funded childcare to discount codes that you can enter at the checkout of an online retailer.