The rate of inflation in the UK hit a new 40 year high in July at 10.1% whilst also registering the first annual double digit rise in the same period.
The Office for National Statistics confirmed that consumer price inflation increased from 9.4% to 10.1% and significantly higher than the predicted 9.8% for the period. The increase has been caused largely by rises in the price of food and other staples.
The bad news does not end there with most economists expecting further increases to consumer price inflation due to the rapidly increasing cost of natural gas. It is now widely expected this will push Britain into a recession tipped to last throughout 2023.
Earlier this month the Bank of England (BoE) increased the base rate by 0.5% to 1.75%. The half point rise was the first one of this amount since 1995. With many economists predicting inflation could peak at 13%+ in October 2022 further interest rates rises could be on the cards.
Economists in a Reuters poll earlier this week, expect the BoE to raise interest rates by a further half point to 2.25% at its next meeting in September.
What impact does the Bank of England base rate have on mortgage rates?
In a nutshell, the BOE base rate will impact the following areas of your finances:
- The amount of interest you can earn on your savings
- How much you will be charged to borrow money
The Bank of England lends money to commercial banks, such as those that lend to home owners and those looking to get on the housing ladder. In return the commercial banks pay interest at a level which is dictated by the base rate.
The Base rate also impacts ‘Swap’ rates, or the interest rate banks charge when lending to each other. When the BoE rate is changed, lenders will typically pass these costs onto you by rising their own rates. Mortgage rates to individual homeowners are almost always higher than the BoE base rate, as a lender is looking to make a profit over and above the rate it is borrowing money from the BoE. Savings rates are almost always lower than the BoE base rate for the same reason – the difference in either case is the profit banks are looking to make to cover their costs and for their own financial gain.
How will a base rate rise impact my mortgage?
If you are on a fixed rate, the simple answer is, it won’t…. yet. A fixed rate means you pay a fixed interest rate until you product term expires.
Once your fixed rate period ends you will have two options – remain on the lenders standard variable rate or secure a new product (either with your current lender or a new one).
Many borrowers are now coming to the end of fixed rate products secured when rates were historically low and as a result are now facing significant increases in monthly payments.
What are your mortgage options?
So what can you do? Andy McBride, Director at Cleerly had this to say:
“We are now seeing a large number of clients coming off historically low interest rates. Recent base rate increases has caused lenders to increase interest rates on an almost weekly basis. If you are a contractor on a fixed rate mortgage coming to end in the next 12 months or are currently sitting on a variable rate, I would advise you to engage with a specialist mortgage broker as soon as possible so you can start reviewing your options.”
“While it is quite likely you will be looking at a rate increase, one of our specialist consultants will be able to source the most suitable option for you and your circumstances to ensure you do not pay more than needed.