borrowers are lulled into false sense of security in an ‘era of cheap money’.
It is easy to forget the BOE base rate has averaged more than 7% over the past fifty years and more than 4% in the past twenty years. Buyers and owners must be realistic that rates will go up at some point.
What will happen if the BOE rate returns to its 20 yr average?
If you have a mortgage of £500,000 on a £750,000 property your monthly interest payments at present (excluding the capital repayment) on a standard variable rate mortgage of 2.5% above BOE base rate (3.0%) equates to £1250.00 per month.
If the BOE rate increases by 3.5%, will mortgages increase by the same amount?
If you did not re-mortgage, yes, your interest payments jump to £2500.00 per month.
On one hand, mortgage rates increase in line with the BOE, but, increasing BOE rates (generally) means the economy is improving. This in turn creates competition between lenders and more choice for the mortgage consumer.
For example, most mortgage products are presently 2.5% above BOE and the cost of moving to another lender is prohibitively costly. Switching to a better rate may seem appealing until you look at arrangement fees of 3.5% making a change of product futile.
In a more competitive market, mortgage products 0.5% above BOE base rate would be more commonplace.
It is hard to say to what extent rising rates will impact London property prices as the market is affected by variables other than interest rates.
Levels of unemployment, population growth, overseas buyers, strength of the pound and the number of new-build homes are just some of the factors on the London property market. The market variables affecting London are not necessarily the same as those affecting the rest of the UK which tend to be affected more by unemployment figures.
Regardless of whether you are buying an investment property or home, getting the right mortgage product is important. In the current market it is sensible to get a product without restrictive early repayment charges (unless of course you can get an excellent fixed rate). When rates do start to increase, it is good to have the flexibility to shop around for a better product.