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How does the base rate affect tracker mortgages?
The Bank of England base rate affects tracker mortgages more than any other mortgage product.
The reason is, tracker mortgages are directly linked to the base rate. This means that when the base rate moves, trackers will move in line with this benchmark when it happens.
For instance, if you have a tracker mortgage at 1% above the base rate, and the base rate is at 2.25% for example, your interest rate would be at 3.25%.
If the base rate were to rise to 3%, your interest rate will jump to 4%. Even without the bank or building society changing their products, it would go up.
If the base rate were to go down to 1.5%, your interest rate would decrease to 2.5%.
Tracker products can be seen as riskier as you have no control over the monthly payments as they will be dictated by the Bank of England base rate.
This is different to a fixed product that locks you in for a certain amount of time at an agreed rate.
You should talk to a mortgage adviser who can explain the products in more depth and make a recommendation suited to your circumstances.
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How does the base rate affect fixed mortgages?
Most people would argue that the Bank of England base rate does not affect people with fixed rate mortgages.
This is mainly true because any base rate changes will not result in your fixed mortgage going up or down.
When you take a fixed rate mortgage, pick a product that is fixed for a certain amount of time, for example, 2, 3, 5 or 10 years.
During this time, your payments will remain the same along with your interest rate.
Where the Bank of England base rate may have an effect is when you are coming to the end of your rate and looking for a new product.
Although fixed rate mortgages aren’t directly linked to the base rate, lenders pay close attention to this rate when pricing their own products.
In a market where the base rate is high, fixed mortgages will usually follow suit. This means any increases or decreases in the base rate will likely affect you when you come to negotiate your next product.
If you are talking to your current lender about a new product, a mortgage adviser may be able to find you a better deal.
They can look at products with your current lender and assess them against the rest of the market to find the most suitable solution for you.
How does the base rate affect a lender’s standard variable rate?
A lender’s standard variable rate is set by them, and not directly linked to the Bank of England base rate. This is unlike a tracker product that will move with the base rate regardless of anything else.
With a lender’s standard variable rate, they choose when to increase and decrease this rate, paying close attention to the economy and the base rate.
At times when the base rate is increasing, it is likely that your lender will increase their variable rate at the same time.
This means that when your mortgage product ends, for instance your fixed mortgage, your revert rate could be higher.
At this point you may wish to refinance the property, or pick another product with your lender.
If you are on a discounted variable rate, increases or decreases to lender’s standard variable rate will affect your mortgage product.
For example, if you are on a product that is discounted from the lender’s standard variable rate by 1.5%, and their variable rate is 5%, your current interest rate is 3.5%.
If a lender increases their variable rate to 6%, your discounted product is now at 4.5%.
Lenders usually send out letters to their borrowers to inform them that they are making changes to their variable rate, notifying customers what to expect with their mortgage.
How does the base rate affect interest rates on bridging loans?
Changes to the Bank of England base rate can also have an effect on bridging loans.
If you already have a bridging loan, it will likely be at a fixed rate for a certain amount of time, such as 12 months.
If this is the case, an increase in the Bank of England base rate would not affect the interest rate that you pay on your current bridging loan.
You should check your bridging terms to find out what product you took to see if this is the case.
For new bridging loans, increases in the Bank of England base rate and swap rates, may play a part in increases to the products in general.
The Bank of England base rate rising generally follows with lenders lifting interest rates on new products.
If swap rates are to increase, lenders need to borrow this money themselves to then lend and they may need to increase the interest rate to make the same margin on their products.
If you are planning on taking a bridging loan and want to understand more about how bridging finance works, you should look for an adviser with experience in this market.
Do your due diligence before taking any bridging finance and be sure to know your exit strategy when it comes to paying back the loan.
How does the base rate affect commercial mortgages?
Bank of England base rate changes can also have an effect on commercial mortgages.
This may even affect your current commercial mortgage, as many of them come with variable rates.
This is not always the case, so check your original mortgage offer to find out whether you are on a fixed product, or variable.
If the product is variable, it may be linked to the UK swap rates.
With the Bank of England base rate increasing, this often leads to an increase in swap rates too.
If your commercial mortgage lender assesses their variable rate based on the swap rates, the lender increasing the variable rate may cause your monthly payments to go up.
Regarding commercial fixed rate mortgages, new rates are likely to be higher when the Bank of England is lifting their base rate, or swap rates are increasing.
This will affect you if you are planning on buying or refinancing a commercial property, planning to take a new mortgage.
You should talk to a commercial mortgage adviser who can understand your situation and go over the products in detail.
Your commercial mortgage adviser will likely be a member of the National Association of Commercial Finance Brokers.
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Changes to the Bank of England base rate have a major effect on almost all new mortgages in the UK.
Even if the mortgage is not directly linked to this benchmark, changes made to it can often reflect pricing of new products going forward.
If you have a tracker rate product, this will be directly affected as the rate moves in line with the Bank of England base rate.
Even bridging loans and commercial mortgages are often affected by base rate and swap rate changes.
If you are thinking of taking a mortgage, you should talk to a professional mortgage adviser to find out what product is most suited to your situation.
They will take the time needed to understand your full circumstances before making a recommendation.
If you would like I NEED ADVICE to match you with an experienced mortgage adviser, to explain your options, please complete the contact form.