What would this mean for your mortgage? – Forbes Advisor UK
With an inflation rate of 4.2% in October – close to its 10-year high of 4.8% in November 2011 – the Bank of England is increasingly expected to raise the rate discount from its current all-time low of 0.1% in its next announcement on the subject on December 16.
The Bank of England announced on November 4 that the rate would remain at 0.1%. This was already a surprise to many commentators, who expected the hike to help cool the economy and lower inflation, which stood at 3.1% in September.
But what exactly is the discount rate and how might an increase affect you? Find simple answers to the most common questions below …
What are the interest rates now?
The Bank of England’s discount 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 well 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 the base rate or raise it or raise it. lower – 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 November 2, the vote was 7-2 to keep interest rates at 0.1%. The final interest rate announcement for 2021 will take place on December 16.
Why might interest rates rise in December?
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 October stood at 4.2% – a significant increase from the 3.1% reported in September, and more than double the Bank’s 2% target set by the government . Many commentators are convinced that there will be an interest rate hike in December, with potential further increases in 2022.
Announcing its decision on November 4, the bank said economic indicators suggest the base rate could reach 1% by the end of 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, although 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 translated into a sharp rise in household energy costs just in time for the colder weather, and the regulator’s price cap rose 12% in October. 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.
In due course, 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 midway 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 appears that the reductions in fixed offers that borrowers have enjoyed in recent months could affect their 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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