No one could argue that borrowers who have variable rate mortgages have lost out because their monthly repayments have increased due to the extra interest due. However there is debate over whether borrowers of fixed rate mortgage products are better or worse of than before the recent base rate rises.
The interest rates set on fixed rate mortgage products are not necessarily tied to the Bank of England Base Rate. Rather, they are derived from the cost of borrowing to the lender, which is called the swap rate. While the base rate has risen over the past year, so have swap rates. This should result in an increase in the interest rates offered by lenders on fixed rate mortgages. In other words, lenders would pass on the increasing borrowing costs they are forced to endure to their borrowers.
However, this has not strictly been the case. Many lenders have not passed the increased swap rates on to their borrowers and have instead reduced their margins. Some mortgage advisers are claiming that by not passing on the full amount of the increase in swap rates, the borrowers are gaining a huge benefit. Other mortgage advisers, however, are quick to point out that although the interest rates offered on fixed mortgages haven’t risen in line with the increase in swap rates, they have risen, and borrowers are worse off as a result.
Whatever their individual opinions, mortgage advisers have been busy helping their clients save money by remortgaging to more favourable products as interest rates increase. This flurry of activity has meant that mortgage advisers may be the real winners as they receive commissions and fees from mortgage lenders for each remortgage they complete for their clients.
Each time the Bank of England raises the base rate to curb inflation many lenders subsequently increase the interest rates they charge on their mortgage products. This is because most mortgages have interest rates that are calculated as the Bank of England Base Rate (BoEBR) plus a certain percentage point – for example BoEBR + 1%. A mortgage with an interest rate calculated in this way would have a rate of 6% if the BoEBR was sitting on 5%.
The base rate is normally increased or decreased by one quarter of a percentage point in modern times. When it is increased several times in succession home owners with mortgages begin to feel the pinch as their monthly repayments increase. This can lead to a flurry of activity in the home loan market. Some borrowers will look to remortgage to other home loan products in order to source a cheaper variable rate deal while others will look to lock in their monthly repayments with a fixed rate product.
When this happens mortgage advisers become extremely busy as they hurry to arrange new home loan products for their customers. Advisers normally charge a fee for sourcing and arranging mortgage deals for their clients which means that they will benefit financially from periods of high activity in the BoEBR.
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