The Bank of England (BoE) has announced its 12th consecutive interest rate increase, raising its base rate by 0.25% to 4.5%. This is the highest interest rate the UK has seen in almost 15 years, and it is being implemented to tackle the high levels of inflation. The UK’s inflation rate is currently at 10.1% for the year up to March, which is above the government’s target of 2%. The BoE expects inflation to fall quickly, to around 5% by the end of this year, and meet the 2% target by late 2024.
The Monetary Policy Committee released its analysis of the UK economy, which supports the Bank’s decision to raise interest rates. The financial markets have also predicted that the Base Rate will peak at around 4.75% in the autumn. In the absence of any unexpected shocks to the economy, it appears that interest rates will remain at or around the current level for longer, before slowly coming back down.
The BoE’s decision to increase the Base Rate will have an impact on mortgage rates. Average fixed-rate mortgage rates have been slowly edging up in anticipation of the Base Rate reaching 4.5%. Lenders set these rates based on the market’s view of what the Base Rate will be in two, five or even 10 years’ time, which are called ‘swap rates’. Rightmove’s mortgage expert, Matt Smith, believes that there is unlikely to be any immediate change in lender rates based on this decision. Lenders are more likely to wait and see what impact the Bank’s comments on the economy will have on swap rates.
For current mortgage rates, an average five-year fixed 85% Loan-To-Value (LTV) mortgage rate is now 4.52%, up from 4.44% last week. However, home-buyers coming to the market soon may find that the amount they need to repay each month doesn’t change significantly. Matt believes that lenders will try to remain competitive to meet the demand from home-buyers looking to move, particularly in the typical first-time buyer sector. He has also seen some lenders launching creative ways to help segments of the market get onto the property ladder, such as Skipton Building Society’s 100% mortgage product.
Changes to the Bank’s Base Rate can impact how much interest borrowers will pay on loans, including mortgages. For those on a fixed-rate deal, their monthly payments won’t change until the end of their deal. However, those on a variable or tracker mortgage will almost certainly see their payments go up. Matt believes that those on a tracker mortgage may be more disappointed with the news as they may have thought that the Base Rate had peaked in March. This is another cost they will need to factor into their monthly budget when the full rate rise is passed on.
In conclusion, the BoE’s decision to increase the Base Rate will have an impact on mortgage rates. Lenders will continue to monitor the market’s view of what the Base Rate will be in the future before making any changes to their rates. The increase in interest rates will impact those on a variable or tracker mortgage, and they will need to factor in the additional costs when the full rate rise is passed on. However, the impact on those on a fixed-rate deal will not be felt until the end of their deal. First-time buyers are likely to continue to face affordability challenges, but some lenders are launching innovative products to help them get onto the property ladder.
