Product Changes – Rates on the Way DownMany homeowners will have breathed a sigh of relief following the Bank of England’s recent decision not to raise interest rates for the time being. However this story might just have a sting in the tail.

According to the information that accompanied the decision, the Monetary Policy Committee believes that mortgage rates may be about to start rising anyway. This is due to the increased costs borne by the banks in recent times.

What effect will this have on mortgage holders?

Obviously if banks and building societies do choose to raise their rates, people on variable rate mortgages will see their payments increase in the near future. The amount they will have to fork out each month will vary depending on the amount they borrowed and the loan-to-value (LTV) mortgage deal they have in place.

Basically, the lower the amount they owe and the lower the percentage owed stands against the value of the property at the time of purchase, the less cash they are likely to have to find.

Are rates already increasing?

Yes it looks as though they are. According to the Financial Times there were just six mortgage products that increased their rates in January this year. Compare that with the 36 mortgage products that saw a hike in rates in July, and you can see how sharp the contrast is.

Clearly if there is a need to change your mortgage from the one you have at the moment, perhaps to lock in a low rate for the foreseeable future, you should do so as quickly as possible. It is also important not to get locked into a false sense of security. While some thought the Bank of England might start to indicate an imminent rise in interest rates, that hasn’t happened this time around. But it will happen soon, and homeowners should be ready for it.

How much could mortgage payments rise by?

This will depend on a number of factors. However by working on average figures, the comparethemarket.com site has revealed a basic rise of just over £200 a year in additional payments if the base rate rose by a mere 0.25%. That would mean it would rise from the 0.5% it is currently at to 0.75%. If it reached 1% this would translate into an average rise of £420 a year more in mortgage payments.

It’s clear that while a rise of 0.25% doesn’t sound like much, it can translate into a reasonable difference over the course of 12 months’ worth of mortgage payments. Once again the trend is clear – warnings are being given to mortgage holders to be aware of the additional funds they may soon have to find.

As always, Londoners are likely to see the biggest changes when rates do rise. They have the highest monthly payments at the moment anyway. If rates went up by 2% they would pay more than £300 extra per month as a result. No doubt they will be hoping the rise is gradual when it does eventually happen.

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