What could this mean for your mortgage? – Forbes Advisor UK
The prospect of an interest rate hike, perhaps by the end of this year, looms on the horizon. But what is it and how could it affect you? Find simple answers to the most common questions below.
What are the interest rates now?
The Bank of England’s base rate is currently set at 0.1%. It was reduced by 0.75% on March 24, 2020, just at the start of the pandemic. For several years previously, it had remained largely at the 0.5% mark.
Who decides what happens to interest rates?
The Bank of England’s Monetary Policy Committee (MPC) meets eight times a year (roughly every six weeks) for its nine members to discuss whether to maintain or raise the base rate or to lower it – and by how much. The MPC takes into account factors such as the rate of inflation, economic growth and the employment rate in the UK. Each member then has one vote, the majority determining the result.
At the last interest rate meeting on September 23, the vote was unanimous to keep interest rates at 0.1%. The last two interest rate meetings and announcements of this year fall on November 4 and December 16.
Why might interest rates go up?
Interest rate hikes are used by the Bank of England to curb rising inflation, the idea being that if the cost of borrowing increases, individuals and businesses will be less willing to take out loans for spending purposes, which would suppress demand and lower prices.
The inflation rate for September stands at 3.1%, down slightly from 3.2% in August, but still well above the 2% target set by the government. Speculation has grown that there could be a hike in interest rates before the end of this year, with further increases potential in 2022.
Speaking recently to an online panel hosted by the Group of Thirty, an economic advisory group, Bank of England Gov. Andrew Bailey said that while he believed spike in inflation would temporarily, its rise could “be higher and last longer” due to the current surge in energy prices (more details below).
The labor market is also showing signs of being strong enough to withstand a rate hike. According to data from the Office for National Statistics (ONS), the employment rate in the UK in September was around 75.2%, which, while still below pre-pandemic levels, is 0.5 percentage point higher than in the last quarter (February to April 2021).
Why is inflation increasing?
Inflation – the cost of general goods and services – is driven by global supply shortages following a return to trade after the Covid lockdowns.
The shortage of microchips, which has caused supply problems for items ranging from game consoles to in-car technology for new cars, is a prime example. A shortage of new cars has, in turn, impacted the used car market which, according to AutoTrader figures, was 21% more expensive in September compared to the previous month.
A staff shortage in some areas also leads to subsequent increases in costs – the most recent and notable example being heavy truck drivers, which has led to the recent fuel shortage in forecourts across the country. According to the ONS, the cost of fuel in September 2021 (at 134.9 per liter) was the highest recorded since September 2013.
Meanwhile, soaring wholesale gas prices have translated into a sharp increase in household energy costs just in time for the colder weather. Cheaper fixed energy tariffs have completely disappeared from the stock, which means that there is no savings to be made by looking for a better deal.
What does rising interest rates mean for mortgages?
One of the main concerns surrounding rising interest rates is the potential impact on the cost of mortgages.
Homeowners with follow-on mortgage agreements should see an immediate change in their monthly payments because their rate is directly tied to interest rates.
Over time, a rate hike will almost certainly affect homeowners who pay a Standard Variable Rate (SVR) or a reduced deal linked to an SVR, as lenders will also adjust this independent borrowing rate.
Borrowers halfway through a fixed rate deal will not be affected by an interest rate hike until the offer ends, at which time they revert to their lender’s respective SVR.
However, a market expectation of a rate hike will affect the cost of financing new fixed-rate mortgage deals from lenders, according to David Hollingworth of mortgage broker London and Country.
He said: “We have already seen signs of increases in fixed rates and while competition should help keep some offers attractive, it looks like the cuts in fixed offers that borrowers have enjoyed in recent months may end. and even start to reverse. “
The cost of fixed rate mortgage deals has been so low in recent months that, according to a London and Country study (October), borrowers could have overpaid up to £ 2,500 per year if they had neglected to shop at the end of their agreement.
You can see the mortgage rates available in our live table below, selecting your situation and criteria.
What about savings?
However, the prospect of higher interest rates could already have a positive impact on the savings market.
According to Moneyfacts’ UK Savings Trends Treasury Report, the number of available savings accounts peaked since the first foreclosure in 2020 while at 0.76%, the average rate on longer fixed-rate bonds term (over 550 days) exceeded 1% for the first time since June 2020.
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