HOME owners and first-time buyers are being encouraged to secure fixed-rate loans while they can, after the Bank of England set the highest interest rate in almost 15 years.
While first-time buyers would normally be encouraged to get a two-year fixed-rate mortgage, a five-year loan might be the best option to avoid even worse rates in future, according to The Mortgage Shop, whose managing director said that home owners who had been used to low rates might need to live more frugally to pay their mortgages.
Yesterday, the Bank of England raised interest rates from 4.5% to 5% – a higher rise than had been anticipated by most analysts.
One of the only tools the Bank of England has at its disposal to attempt to slow the rate of inflation, the increase in interest rates means that savers will make more money but that loan and mortgage repayments will go up.
But high prices are not the only obstacle that buyers will have to face, with many failing lenders’ affordability tests, according to Peter Seymour, managing director of The Mortgage Shop.
At the time of publication, banks had not published their new interest rates but Mr Seymour said he expected them to be very high – possibly ranging from 5.75% to an ‘outrageous’ 8.14%, up from between 5.25% and 7.64% before yesterday’s hike.
‘It is going to have such an impact on everybody and the economy,’ Mr Seymour said.
First-time buyers
First-time buyers generally have three options for payments, according to Mr Seymour: a tracker rate, a two-year fixed rate and a five-year fixed rate.
Though he said a two-year fixed rate would normally be a good option, he said that, at the moment, a five-year fixed rate would be best to safeguard against future interest-rate hikes.
He added: ‘Do not go anywhere near a tracker rate at the moment.’
Mr Seymour added that with interest rates already high, many first-time buyers were failing affordability tests and could not get a mortgage.
He said: ‘Most mortgage applications are currently failing.’
He suggested that people could also test the market to see whether house prices might go down, explaining: ‘House prices will fall because they are at an artificially high level.’
People renewing mortgages
The other group of people negotiating mortgages at the moment, home owners whose fixed-rate mortgages are coming to the end of their term, needed to prepare to pay much higher rates than previously, Mr Seymour said.
‘The impact hasn’t been felt yet. It will certainly happen and people are going to have to economise dramatically,’ he added.
‘They are going to have to move to much higher rates of interest, but there is no easy fix to this.’
He said that people who had got used to paying low rates and had bought a car or enjoyed regular holidays may need to change their spending habits.
His advice was to seek advice and shop around for better rates.
