You may have heard in recent news that the Federal Reserve in the United States has raised interest rates. This headline might not have meant anything to you at first glance, but are there any implications for borrowers here in the UK? Read on to find out what the first rate rise in the US in 9 years means for us.
What exactly happened in the US?
The US Federal Reserve, the US equivalent of the Bank of England raised its base interest rate by 0.25%. This is the first rate rise from the Federal Reserve in just over 9 years. Rates have been kept artificially low by the Fed in the US since the financial crisis in 2006. The reason for this was to make the cost of borrowing relatively cheap and therefore be a stimulus to growth.
The rate increase by the Fed is a good sign that the US economy is well and truly on the mend.
Will the Same Happen Here in the UK?
The US and UK markets have mirrored each other for quite some time, so the rate increase in the US is an indication that the same will happen here in the UK soon.
Mark Carney, the Governor of the Bank of England said recently that he was in no rush to make an interest rate increase, but the feeling amongst experts in the city is that this position will need to change with an interest rise by around Spring 2016.
What Will a Rate Increase Mean in the UK?
With interest rates being kept low here by the Bank of England for so long anyone who haw taken out a mortgage in the last 9 years will not have experienced an interest rate rise.
Unlike mortgages in the US, most mortgages in the UK are are index linked at a few percent above the Bank of England base rate. This means that the interest rate of a mortgage, or any other borrowing that tracks the Bank of England base rate, will rise with the Bank of England base rate.
Even a small quarter percent interest rate rise can make quite large increases in the monthly mortgage repayments of borrowers.
What is Expected for UK Interest Rates Long Term?
The Bank of England have previously indicated that they expect the interest rate in future to be half of its historical average; that would be approximately 2.5%. Obviously a 2.5% interest rate would cause very large increases in the mortgage payments of homeowners.
An example reported by Sky News this week, showed a typical tracker mortgage on a £200,000 house with a £150,000 mortgage costing £165 per month more in the event of a 2.5% interest rate rise.
Interest Rate Rises Worry Me, What Should I Do?
If you have any concerns about your mortgage or you are about to renew your mortgage, talk things over with your lender or get advice that covers the whole of the market from our mortgage brokers here at Search Mortgage Solutions. We are able to advise across all the mortgage products on the market, including mortgages that offer more protection against interest rate rises than standard tracker mortgages. We look forward to hearing from you.