Affordability of Increased Mortgage Rates

Author: Samuel Beckingham
Updated: Aug 23, 2022
7 minutes read

The Bank Rate is the most important interest rate in the UK. It affects mortgage rates, property prices and is used to keep inflation in check. It has been at 0.1% since March 2020 but has recently rocketed to 1.75% in an attempt to combat rising inflation and the cost of living. This has been the biggest increase in 27 years.

The Bank of England expects inflation to rise to 13.3% by the end of 2022, which is a sign that interest rates might rise further. But higher base rates mean higher mortgage rates. 76% of homeowners are on a fixed rate mortgage, which means that when they come to remortgage, rates may be even higher and may be less affordable.

We’re going to look at what a potential increase in 3, 5 and 7% will do to mortgage rates and the housing market in general. In a way, the Conservative leadership race has brought about this debate, as Liz Truss’ campaign has been reported to lead to a base rate as high as 7%. We’ll look at each increase individually.

What Might a 3% Increase Look Like?

L&C Mortgages has analysed that the interest rate on a typical two year fixed mortgage has increased from 1.3% to 3.46% since January 2022, which equates to about a £159 extra payment per month. We’ll take the average fixed rate at 3.5% for the sake of our example.

If rate rises are reflected in fixed mortgages, this could mean an average of 4.75% if the levels rose to 3%. Lloyds Bank offers a standard variable rate (SVR) at 5.24%, which is above these predicted levels already. Taking this as a base, it would mean an increase to 6.49%, but this is a too simplistic view. Interest rates are rarely 2% above the Bank Rate.

A current 3.5% fixed rate mortgage at £250,000 over 25 years might cost £1,126 a month. A 3% increase could up this to £1,283.

Raymond Boulger, Senior Mortgage Technical Manager at John Charcol, thinks house prices will fall by about 5% next year if interest rates peak at 2.5 or 3%.

What Might a 5% Increase Look Like?

L&C Mortgages calculates SVRs going as high as 8.49%, equating to about a £308.84 a month increase on a £150,000 mortgage.

A current 3.5% fixed rate mortgage at £250,000 over 25 years might cost £1,126 a month. A 5% increase could up this to £1,811.

At a 5% increase, when fixed rate mortgages end, it will be difficult for borrowers to remortgage as it becomes more expensive to do so. Product transfers would still be available.

What Might a 7% Increase Look Like?

A current 3.5% fixed rate mortgage at £250,000 over 25 years might cost £1,126 a month. A 7% increase could up this to £2,124.

House prices could fall by up to 25%, says Boulger, as mortgages become unaffordable. Fewer buyers and forced sellers, unable to afford higher rates after their fixed rate ends, would crash house prices as there would be an imbalance in wage rises and living costs.

The affordability stress test should ensure that people can afford a 7% increase, as mortgage rates would have been tested to that level to start with. But that doesn’t take into account the levels of inflation and cost of living. Even though the Bank of England scrapped this test, many mortgage brokers will continue to use it.

Renters wouldn’t necessarily be safe from this increase either as private landlords would have to increase their rent to factor in rising costs.

How You Can Offset This Increase

Percentage rises are expected to come, but you can offset this by claiming through our moneyback services.

Tax Rebate for Uniform Wearers

Uniform tax is if your work requires you to wear a uniform or protective clothing and you have to wash or repair it yourself. It can apply to nurses, police, firemen and even staff who work in a branded t-shirt. If this is the case, you may be due a tax refund from HMRC.

For more information, see our Complete Guide to Uniform Tax Rebate.

Working from Home Tax Relief

If your company has required you to work from home, then you may be eligible to claim back on increased utility costs such as heat or electricity used at that particular time.

See our How To Claim Working from Home Tax Relief: Complete Guide for more information.

PCP Claims

If in the last six years, you were not made aware of any commission being charged when organising your car finance, or if the advice given was considered poor or negligent, then you may have been a victim of mis-sold car finance.

See our PCP Car Finance Claims page for more details.