By Fiona Parker, Amelia Murray and Helena Kelly 

Today’s Bank of England will be the center of attention as it considers raising interest rates for the first-time in over three years.

This would signal the end for ultra-low-cost loans and raise the cost of millions mortgages in a matter of seconds. Since the outbreak of the pandemic in March 2013, the bank’s base rate has been at an all-time low of 0.1 percent.

The bank unanimously voted in favor of a reduction from 0.25 percent to protect households from the economic havoc Covid-19 would soon cause.

With inflation expected to soar above 4%, rates will likely need to rise in order to stop spiralling prices.  Many banks and building society have large branches.Already secured scores of the best deals available on the market In anticipation.

At the beginning of last week, there were only 82 mortgages priced at a rate less than 1%. Analysts at Defaqto said that there were only 22 remaining mortgages yesterday.  Despite rising taxes and prices, homeowners can still make great strides to lower their largest household bills.

Money Mail will tell you everything you need about what a rate hike would mean for your situation and when it’s worth sticking or twisting.

Tracker tears

According to UK Finance, 850,000 borrowers are on tracker loans that follow the base interest rate. 

Lenders must give borrowers at the base rate one month notice before they adjust their repayments.

The average rate for tracker deals households will not increase until next month even if the base rates are increased. The current average rate on a tracker agreement is 2.45 percent.

If the base rate was hiked to 0.25 per cent today, it would increase repayments on a £150,000 loan taken over 25 years by £12 a month from £669 to £681 — £144 a year — according to analysis by AJ Bell.

If base rate rose to 0.75 per cent by the end of 2023, the same mortgage would cost £719 a month, an increase of £50 a month or £600 a year. 

And if the Office for Budget Responsibility’s (OBR’s) worst case scenario occurs, where base rate climbs to 3.5 per cent in 2023, the same monthly bill would be £962 — a £3,516 a year jump.

David Hollingworth, of mortgage broker L&C, says: ‘Not all trackers tie the borrower in, so homeowners may have an option to jump ship without a penalty and lock into a fix if they are nervous about what the future movement of rates could have in store.’

Variable fright

Standard variable rate households are at the mercy of both the Bank of England as well as lenders. 

According to Jane King, a mortgage advisor at Ash-Ridge, this could mean that rates for the 1.1 million homeowners in these deals could rise faster than any base rate hike. Lenders still need to give a minimum of one month notice before altering repayments.

When the fixed-term ends, household members are automatically rolled onto higher-priced standard variable rates. These deals can lead to savings of hundreds of pounds each month for borrowers who choose not to cancel.

AJ Bell figures show households on Barclays’ standard variable rate are paying 4.59 per cent in interest — £841 a month on a £150,000 loan.

If this rate rose in line with the OBR’s worst case scenario, repayments could increase to £1,157.

HSBC, by comparison, offers the lowest two-year fix in the market at 0.99 percent for borrowers who deposit a minimum of 40%. 

Switching from Barclays’ standard variable rate could bring down monthly payments to £565 — a £5,625 saving over two years after the £999 fee is taken into account. 

However, thousands of homeowners remain locked in these high rates after the financial crisis. 

This means that “mortgage prisoner” could face even more trouble if interest rates rise again and they are unable move to a better deal.

Campaign group UK Mortgage Prisoners’ Rachel Neale says that she knows of people who are on standard variable rates of as high as 10% and any rate increase could make the difference between someone losing their home or keeping it.

‘It’s a devastating time for mortgage prisoners, some of whom are living off just £300 a month once their repayments are made.’

Tightening up 

Due to competition, historically low rates have been combined with generous lending. Several large lenders recently announced they would allow wealthy homebuyers to borrow five-and-a-half times their income — a record high.

The cost-of-living crisis will also impact how much homeowners can borrow. Lenders may adjust their affordability calculators.

Halifax has already tightened its belt. Last month it began insisting borrowers earn at least £40,000 to borrow more than 4.49 times their income — up from £30,000. HSBC made the same change in September for those who want to borrow 4.75x their income.

Even though smaller deposits are more common, borrowers with 15% deposits have the most options. Because these rates are already higher, lenders have more flexibility.

Robert Payne, Langley House Mortgages director, said: “Lenders are now more confident to accept self employed applicants and those with low deposit because the impact on Covid is more measurable, predictable, and they have had the time to develop criteria to assess individual circumstances. 

However, first-time buyers might be more vulnerable if the market shifts because they are already paying more.

Scramble to fix

The best rates are rapidly disappearing. Ulster Bank is currently the only lender that offers a five year deal below 1%. 

Even though many of the best deals are gone, average interest rate have barely risen and they remain very low. 

Two-year and five-year loans have only increased by 0.04 percentage points to 2.29 per cent and 2.59 per cent respectively in the past month, according to Moneyfacts.

HSBC’s lowest two-year rate at 0.99 per cent is only 0.2 percentage points more expensive than the cheapest ever offered. 

Brokers report that they have been overwhelmed by calls and emails coming from families wanting to lock into a low fixed price. Many are switching to longer-term fixes over two-year contracts.

Emma Jones, managing Director of Alder Rose Mortgage Services says: ‘It is clear that people are acutely aware that rates will rise pretty soon. 

“Most of the deals that we switch people to are five year ones.” Two-year deals are not popular with homeowners at the moment.

NatWest is offering the cheapest five-year rate at 1.13 per cent, with a £995 fee. This would fix monthly payments at £574 for a household with a £150,000 mortgage and 40 per cent deposit. 

Many borrowers want to make their payments affordable for ten years. Virgin Money offers the cheapest rate for ten years at 1.95 percent. The same household on this deal would pay £632 a month.

However, those who decide to stay longer should be aware of any expensive early exit fees that may apply if they need to move before the term ends.

Habito offers the longest-fixed deal on the market: a 40-year home loan at 4.65 per cent or £686 a month with a £150,000 loan. There are no fees for leaving the online lender’s mortgages over-the-limit.

Break the contract?

According to UK Finance, 1.5 million fixed-rate agreements will expire next year. Homeowners should consider switching six months before the term ends. Most lenders will allow you to reserve a deal starting at this point.

Nick Mendes, mortgage technical manger at broker John Charcol, said: “If rates continue to decline between now and then you could consider switching to a lower interest rate in that period with the lender. It’s a win-win situation.

Fixed deals that are over six months away from expiring might still be worth switching. For most people, however, any savings will be erased by penalties of up to 7% on the loan.

Dominik Lipnicki of Your Mortgage Decisions says that he has a client who is considering ending his five-year contract 20 months early. 

It means he would have to pay a hefty repayment charge of 4 per cent — around £30,000 on his £750,000 loan. He believes that the security that a ten year deal can offer is worth it.

Mr Lipnicki states that he expects to see more people leaving fixed-rate contracts early. . . Some may consider early repayment charges.

Overpay for play

It could be a smart move to invest your spare cash in your mortgage, especially with savings interest rates at an all time low.

Mortgage costs remain low so borrowers are able to afford larger monthly payments. Santander says borrowers have cleared an extra £1.3 billion of mortgage debt this year.

Overpaying just £3 a day on a £250,000 loan at 2 per cent could save £7,170 in interest over a 25-year term. 

This would cut down on the loan’s lifespan by two years, five months, and save you money. If you could spare £10 a day (£300 a month) you could slash your interest bill by £19,133 and clear your mortgage six years and eight months earlier, according to mobile phone savings app Sprive.

Most providers allow borrowers the freedom to overpay by 10% of the outstanding balance each year, without any penalty. Cash is always a good option for emergencies.

Laura Suter is the head of personal finance for investment platform AJ Bell. She says that it’s better to overpay your mortgage for shorter periods than you would otherwise because you’ll be paying less interest.