How a rate rise would affect your mortgage repayments

A new report warns borrowers that interest rate rises could push mortgage repayments up by £576 a year from 2015.

A new report is warning mortgage borrowers that they could see their annual repayments increase by up to £576 a year if predictions about interest rate rises come to pass.

The Financial Flexibility Report undertaken by Barclays Mortgages is based on information from the Centre for Economic and Business Research (Cebr). It uses two economic models (‘moderate’ and ‘drastic’) to determine the financial impact on homeowners should the Bank of England Base Rate rise over the next 23 months.

The Bank of England Base Rate, which has been kept at a historic 0.5% low for five years since March 2009, has helped keep mortgage rates down and repayments relatively affordable. But signs the economy is improving have prompted speculation about possible rises being on the horizon, which some may be ill-equipped to afford.

Best- and worst-case scenarios

The ‘moderate’ model, considered the most likely to happen, predicts that the base rate will rise three times over the next 23 months and would end up at 1.25% by December 2015.

This 'best-case' scenario represents a 0.75% increase and would mean mortgage repayments would go up by around 3%.

On an average monthly mortgage repayment of £666 the change would add £21 a month, bringing the total to £687. This equates to paying £252 extra a year.

Meanwhile the  ‘drastic’ model, considered feasible by some economic experts, predicts five successive base rate rises taking it to 1.75% by December 2015 – an increase of 1.25%.

In this 'worst-case' scenario average mortgage repayments would increase by £48 a month to £714. This works out as paying £576 extra over a year.

See the latest mortgage rates

The cost of a base rate rise

Below is a table detailing how monthly mortgage payments would change under the two models across regions in the UK by December 2015.

Source: Barclays

Figures were calculated using the latest ONS Family Expenditure Survey (FES), Cebr’s in-house economic models and the Bank of England’s NMG Survey

The research indicates that those who own a home in London will suffer the most from a potential rate rise. The cost here will shoot up by an average £32 a month (£384 in a year) under a ‘moderate’ set of increases or £77 a month (£924 a year) following a ‘drastic’ series of hikes.

Meanwhile those in Wales are likely to suffer the least from a rate rise as they already pay the lowest average monthly payments of £483 a month. Under the moderate model payments would rise by £15 a month (£180 a year) and under the drastic scenario £34 a month (£408 a year).

The report also looked at how the changes would impact income groups. High- and middle-income earners were found to suffer the least from a rate rise. But those on a lower income would suffer most as their financial flexibility is already limited.

The report found that a fifth of households with the lowest incomes spend over half their monthly incomes on mortgage repayments. This proportion only stands to rise if interest rates go up faster than income growth – potentially putting some households in serious trouble.

When will the base rate rise?

It's up to the Bank of England's Monetary Policy Committee to decide when the base rate will rise.

The BoE's Forward Guidance on the issue said the rate would be reviewed once unemployment reached 7% and inflation hit 2%.

So when unemployment reached 7.1% and inflation hit its 2% target in January 2014, many speculated a rise was coming soon.

However, this month the Bank issued 'further guidance' which added in some extra caveats for when unemployment reached its 7% target (expected in the spring) in order for rates to rise.

The additional criteria for a rate rise now includes: inflation being around the 2% target; the economy recovering in line with Government plans for growth and employment; and less 'spare capacity' in the economy, i.e. productivity improving.

Mark Carney, the governor of the Bank of England, also stressed that any rise in interest rates would be "gradual".

For more predictions on when interest rates will rise read What next for inflation and interest rates?

How to prepare for a rate rise

We don't have a definitive answer about when exactly the base rate will rise.

All we do know is that it will at some point and when it does it will have a knock-on effect on mortgage rates.

The Barclays report serves as a clear warning to homeowners to consider their next move in the mortgage market extremely carefully in preparation for when things start to change.

Those on variable or tracker mortgages are more vulnerable to rate rises. But those with a fixed rate mortgage are immune for as long as their deal lasts.

Top fixed rate mortgages

Below is a roundup of the best two-, five- and ten-year fixed rate mortgages across a range of loan-to-values (LTVs; the percentage of a home's value you need to borrow via a mortgage). These can help shield you from any rate rises to come in the next few years.

See how much a mortgage could cost you and get help from an expert mortgage adviser

This article aims to give information, not advice. Always do your own research and/or seek out advice from a regulated broker, before acting on anything contained in this article.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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