Interest rate rise potentially on the cards for 2016

The Bank of England have potentially earmarked January 2016 when interest rates could be set to rise.

The current rate of 0.5% has been in effect since March 2009, meaning the standard variable rate (SVR) for most mortgage providers is around the 4.99 mark based on a report last October.

As a standard variable or tracker rate is usually a set percentage higher than the base rate, then an increase is likely to be reflected in your mortgage payment.

When is the interest rate going to rise?

The Bank of England normally doesn’t increase rates during the festive season. Analysis over the last 20 years has seen interest rate decreases during December, but no increases.

So as the interest rate during December wouldn’t change from the previous month (i.e. November), the earliest we could expect to see this is in either November 2015 or January/ February 2016.

“ In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”

Mark Carney, Bank of England governor

How much are interest rates going to increase?

As recovery continues it seems likely that rates will increase by 0.25% to begin with. Any further increases are likely to be based on how the economy performs .

“It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historical averages.”

Mark Carney, Bank of England governor

Over the last 20 years the average interest rate would be in the region of 4%. If we work on this figure then we could be looking at an increase of up to 2% in the years to come.

What will an interest rate increase cost on my mortgage?

Let’s assume that the next rise, discussed as needing to ‘proceed slowly’, will be a rise of 0.25%. So the interest rate will be 0.75%. Here’s what it will do to your mortgage payment:

Based on an average SVR being 4.5% increasing to 4.75.

Value 4.5% 4.75% 5%
100,000 £556 £570 £585
150,000 £833 £855 £877
200,000 1,111 £1,140 £1,170
250,000 £1,389 £1,425 £1,462

 

While some lenders may absorb the increase others may only increase a small amount whilst selected lenders may increase your payment by the full rate change.

While the rate rise might be good for savers you should remember to save and make provisions for an increase later in the year. If you’re renting then your Landlord may also be faced with these costs which could ultimately be passed on to you.

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