The Bank of England Monetary Policy Committee has today raised the bank base rate by 0.75% to 3.00%, the biggest single increase in 33 years.
The unusually large increase is a result of the Bank tightening monetary policy in a bid to calm inflation. The chancellors decision to delay his long-awaited fiscal statement has also put the Bank in a precarious position of not fully understanding the government’s plans for public finances before making its decision.
Higher rates expected
A recent poll conducted by Andy McBride at Cleerly showed 45% of respondents expected an increase of 0.25% – 0.50%.
It is now expected that inflation will peak above 11% with food prices pushing up expectations. Financial markets have revised expectations that the base rate will reach around 5% next year before declining due to the predicted recession and lower commodity prices.
Clients looking to purchase a new property or secure a new product would do well to secure rates as early as possible. Locking in at a lower rate now would ensure you are protected if mortgage rates take a further turn for the worse.
What does this mean for mortgage holders?
Variable rate mortgage holders are likely to see their mortgage payment increase immediately, whilst those on fixed rates are sheltered for now. However, a total of 1.8 million fixed rate mortgage schemes are due to end in 2023 alone meaning many will be facing large increases in their monthly mortgage payment.
An analysis by Octane Capital calculated the average person looking to remortgage following a three-year fixed rate deal could see their mortgage payments increase by £257 from £702 per month to £959 a month. – The figures are based on a person who paid a 25% deposit on the average UK house price of £232,096 in November 2019.
A glimmer of hope for borrowers?
Alice Guy, personal finance editor at Interactive Investor commented on the mortgage market:
“There may be a glimmer of light for mortgage holders as there are signs of some banks reducing fixed-rate deals a little. Fixed-rate mortgage rates are affected by long-term interest rate trends as banks want to make sure they have enough money to cover future rate rises. Five-year fixes are slightly cheaper than two-year fixed schemes currently, which is a sign that banks expect interest rates to fall in the medium term.”
Sat Singh, Director at Cleerly added:
“Predicting the market in the current financial climate in near on impossible. My advice to any contractor with a fixed rate mortgage due for renewal in the next 12 months is to engage with a specialist mortgage broker as soon as possible. Whilst there is little that can be done to reduce rates, you can protect yourself by reserving rates early as a fall-back position if remortgage rates continue to rise into next year”.