Rising energy costs, interest rates and your mortgage

In this episode, we look at the affect rising Bank of England base rates have on mortgage rates and discuss how you can make your home more energy efficient to combat rising energy costs.

Hello and welcome to this podcast brought to you by Charles Cameron and Associates 

As you may have seen in the news, there has recently been changes announced, by the UK Government in their Spring Budget, as well as by the Bank of England, which could affect your mortgage, either now or in the future. 

So, let’s first of all look at the impact of the Bank of England. In March of 2020, the BoE Base Rate dropped to an all time low of just 0.1% in response to the coronavirus pandemic. However, due to rising inflation, the bank of England decided in December 2021 to start to raise their base rate and increased it to 0.25%. Subsequent rises were announced in February this year to 0.5% and most recently to 0.75% in March. The BoE base rate has been consistently low now for over a decade. In fact it had not been raised higher than 0.75% since 2009. 

However, that has not always been the case. Back in 2007 the base rate was actually over 5% and in  the early 1990’s it even reached over 14%! 

This time however, the Bank of England have indicated that any further rises will likely be ‘small and gradual’. 

So, how do mortgage providers react to Bank of England Base Rate changes?  

When the Bank of England lends money to commercial banks, their interest amount charged is determined by the base rate. The base rate also impacts on ‘Swap Rates’, which is the interest rate that banks charge each other. Therefore, if the bank is paying more to access lending, they are likely to raise the interest rates of their own products, including new mortgage rates and their own standard variable rate.  

However, it is at the lenders discretion to change their rates in line with the BoE Base Rate. Indeed, if lenders have the ability to take on new lending they may decrease their rates. If the lender is behind on service level agreements or have reached a target lending limit, they may increase their mortgage rates in order to reduce the level of new applications. 

So, although the Bank of England base rate does have an impact on lenders mortgage interest rates, it is not necessarily a direct and immediate correlation.  

If you are already on a fixed rate mortgage product, your rate will not change irrespective of market changes during your fixed period. 

For example, if your rate is due to end 01/01/2024, your interest rate will stay at the original agreed interest until this point. After the 01/01/2024, a new mortgage rate would need to be selected from the rates available from the market at that time. 

Conversely, if you are in a fixed rate period but the products currently available in the market are cheaper than what you are already paying, it may be worth discussing this with a mortgage adviser, as it may save you money in the longer term to move lenders even with the costs of any early redemption charges to do so. It may also be worth discussing your options if you are fixed period into a short-term deal and would like to explore longer fixed mortgage products, say for certainty on repayments over the next 5 to 10 years. 

If, you are on a tracker rate mortgage, your repayment will be subject to change, as a tracker mortgage literally tracks the Bank of England base rate and so has a direct correlation to it. 

If you are currently out of any deal period and are sitting on your lenders standard variable rate – or SVR – any rate changes will be at the discretion of your lender and they may not choose to increase their variable rate even if the bank of base rate has gone up, depending on their business priorities. 

Another topic dominating the headlines at the moment, is the increased costs of gas and electric across the country. The cost to fuel your home or a car, may be increasing soon, meaning more of your disposable income will need to be spent servicing this. 

However, there are ways to try and reduce these bills. A term that you may often come across is EPC –  or Energy Performance Certificate. An EPC rating is often shown when buying many things, such as TVs, Vacuum Cleaners, and other electrical appliances to indicate how energy efficient they are. An EPC on your property also indicates how energy efficient it is. The better the EPC rating of your property, the less you will need to spend on heating it – saving you money on your bills. 

By already having a property with a higher EPC rating, or by committing to improving the energy efficiency of a property, you may also qualify for a ‘green mortgage’. 

Firstly, let’s define a green mortgage – a green mortgage is when a bank or lender offers the buyer preferential terms if they can demonstrate that the property they are requesting a mortgage on meets certain environmental criteria. This may include a newly built home with an environmentally-friendly green roof. In other words, it describes a mortgage designed specifically for green buildings, or a mortgage where the borrower commits to invest in improving an existing building’s environmental performance.  

 There are, in essence, three types of green mortgage:  

1. Lower interest rates for people who buy energy efficient properties  
2. Standard mortgages that offer cashback to buyers who purchase energy efficient properties 
3. Mortgages that offer cheaper rates or cashback to buyers who make green home improvements 

From a financial standpoint, green buildings should cost less to run as they’re more energy-efficient, which means lower bills.  

So, what are the pros of a Green Mortgage?  

Well, you can typically get cheaper interest rates meaning lower repayments each month or cashback as a reward for being climate conscious, maybe even both. 

One of the cons may be that as Green mortgages are fairly new to the market, when you come to Remortgage, it is not yet certain what type of deals will be available – but your adviser can help you find the best option. 

If you want to reduce your energy costs but a green mortgage isn’t right for you, don’t worry. There are many different ways that you can finance energy efficient home improvements. Firstly, if you have savings you can pay using your own cash. 

If you don’t have savings, and so would need to arrange finance for improvements, you could use some of your equity in your home for this. 

If you are currently tied into a fixed rate deal, you can apply for further funds from your current mortgage provider, provided this meets their allowable loan to value limits and affordability calculations. The funds would not be added to your existing mortgage, but a second mortgage account will be opened and you would need to choose a mortgage rate from the lenders current product range for this additional borrowing. So, it is important to note and be comfortable with the fact that this means that the two mortgage parts could have different interest rates and product end dates/ tie in periods.  

You could also arrange a ‘second charge loan’ from another lender, however, interest rates are likely to be higher with this option and you should always seek professional advice before doing so. 

If your mortgage is sitting on a standard variable rate or you wish to raise capital on your mortgage as part of an upcoming refinance, you can look to remortgage. This could be for a new mortgage product with your existing provider, or moving to a new lender, in order to release equity from your property. Again, the lending amount requested would need to meet the lenders allowable loan to value limits for capital raising and affordability, so always speak to one of our advisers who can ensure you get the right mortgage for your circumstances.  

Once the financing is sorted, which improvements you make will depend on the age and build type of your home, but typical examples can include: 

• Installing new or improved Insulation, such as solid wall, cavity wall or loft insulation 

• Heating system upgrades – such as more energy efficient boilers, replacing old radiators and using ones with built in thermostats 
• Draught-proofing 
• Installing double glazing 
• Renewable energy generation, such as wind power, solar panels, biomass systems, or air source heat pumps 

So, in summary, if you are concerned by rising inflation, increases in the Bank of England base rate or the energy cost crisis, consider reviewing your current mortgage, in order to ensure that you are on the very best mortgage product for your individual requirements.  

As always, our team of Mortgage Advisers are ready to assist you – with friendly, professional and Independent advice. 

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