Bank rate at 3.5% in 2023 - impact on mortgages

"There is not actually a direct link between the retail interest rates charged on mortgages and the Bank of England's base rate, as mortgage lenders are not borrowing funds directly from the Bank. This means that it is possible for Bank rate to rise, but there not be a matching rise in mortgage rates. Lenders will take the opportunity to increase rates if they can, off the back of a base rate rise, but not always. Other factors will impact a lender's decision making, e.g. what other lenders are doing, how they themselves are doing in terms of lending volumes against target and what is the actual cost of the funds they are lending. All this means that it is quite normal for mortgage rates to not mirror every increase (or fall) in the Bank base rate. If you have just taken a fixed rate mortgage, you are, of course, protected, for the moment, against any rate increases. However, you are at risk of "payment shock" when you get to the end of that fixed rate and available mortgage deals at that point are higher. You should remember that we are currently at a record low point in interest rates and ensure you have capacity in your family finances to take on a slightly higher mortgage payment, as well as keeping an eye on what is happening with mortgage rates." As regards those looking at things at the moment - don't put the interest rate cart in front of the big picture horse! Whilst securing a low interest rate is great, it shouldn't be your main driver in the decision making process. Bigger questions need to be addressed; how long do you think you'll be in the property, do you need to be able to review things in a few years, have you found a property you love - or are you just making do under pressure to buy now? At the end of the day you are taking on a long term contract for a big chunk of debt, secured on your home - consider decisions carefully, don't rush them on the basis of possible interest rate increases. A bad decision is a bad decision whether you got a 1.19% deal or a 1.34% deal.

"When your fixed rate ends you have three options: do nothing and revert to your lender's standard variable rate (usually the most expensive option), switch to a new deal offered by your existing lender or switch to a new deal with a different lender, depending on what works out best. All three options are subject to the available rates at the time, so if you reach the end of your deal at a point when rates have risen there's a good chance you will see your payments go up. "If you are applying for a mortgage currently it is well worth considering if a longer term fixed rate is suitable for you, especially those with lower loan-to-values who plan to live in their property long term."

For many borrowers, the idea that the Bank of England base rate could increase to 3.5% by 2023 is very scary indeed. Those used to record low fixed rates would be shocked to see their payments balloon if such an increase became a reality. The market has not seen rates as high as this since 2008 and many borrowers would find such an increase devastating. Even a 2% increase on a £200,000 mortgage could result in a £4,000 yearly payment increase. Many borrowers who are either on the lender's Standard Variable Rate (SVR) or a few months away from their fixed rate scheme expiring will be keen to secure a new deal now to avoid that risk. Some might even consider paying an early redemption penalty to avoid a significant rise down the line. Potential buyers need to consider what impact will a much higher mortgage rate have on house prices in the future and all borrowers will want to ensure that their payments are affordable if such an increase occurs.

If the base rate increased to 3.5% in 2023, you would expect people who are renewing their existing two-year or five-year fixed rates to see a significant increase. With higher rates, the cost will increase and have a major impact for most people's disposable income. The difference in cost would be much greater for those with a larger mortgage. For example a 3% increase on a £1m mortgage would equate to an extra £30,000 per annum in interest costs. A 3% increase on a £5m mortgage would be £150,000 per annum, the cost of a new sports car.