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Bank of England Raises Interest Rate to 0.5%

As you may have seen in the news yesterday evening, the Bank of England has taken the decision to raise its base rate from 0.25% to 0.5% – the first rate hike in 10 years.

Whilst fixed rates will remain unchanged, and standard variable rates set by individual banks will move according to that bank’s discretion, for tracker mortgages floating on the base rate this will result in an immediate 0.25% increase in the borrowing rate.

This includes Bank of China’s buy-to-let lifetime tracker, which is now at the following rates for loans of £500,000 or less:

  • 3.29% for loan-to-values exceeding 60% up to the maximum 75%
  • 2.99% for loan-to-values of 60% or below

To illustrate what this means, a few scenarios:

  • Borrowing £250,000 over 25 years at 75% LTV will cost £32.84 per month more on a full repayment term.  On an interest-only term, it will cost £52.09 more
  • Borrowing £500,000 over 25 years at 75% LTV will cost £65.69 per month more on a full repayment term. On an interest-only term, it will cost £104.16 more.

Whilst clearly detrimental to borrowing, it should be noted that last year’s rate cut from 0.5% to 0.25% was itself seen as an emergency measure following the EU referendum, and a return to 0.5% has been widely anticipated.

Also important to consider is the statement from BoE Governor Mark Carney yesterday, who alluded to two further 0.25% hikes within three years.  This does support our long-held belief that interest rate rises will be predictable and heavily staggered. A dramatic hike does not appear to be on the cards.

Based on Bank of China’s tracker rates, two further increases would still see them below the current fixed rates by the end of that three-year time-span, assuming the fixed rates do not move themselves.

Looking to the housing market, the consensus is that this rate increase has largely been priced in already.  Indeed, this week Nationwide reported a 0.4% increase in UK house prices for October, despite widespread speculation of an imminent rate rise.

Over the last 18 months, the UK has encountered more significant shocks, and despite activity being down, and the market softening across certain locations, as a whole the property sector has proved itself relatively resilient.

Ben Carpenter

Partner

Tailor My Property Pte Ltd.

For expert mortgage advise please contact our panel of experts

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