Base rate: Are we dealing with the new normal?

May 16, 2023

This March, it was expected that we’d seen the last of base rate increases. With inflation falling faster than anticipated, many were optimistic that 4.25% was where the Monetary Policy Council (MPC) would stop. You could hear a collective sigh of relief.

However, earlier this month, the US Federal Reserve voted to increase interest rates to a 16-year high. And with the UK usually following suit, as well as inflation staying stubbornly above 10%, another base rate hike was inevitable. Last Thursday’s announcement confirmed an increase of 0.25%, bringing base rate up to 4.5%.

This news had further consequences on homeowners and home buyers.

Those on tracker mortgages and standard variable rates (SVR) have seen their monthly payments increase. The average SVR is now above 7%, its highest since 2008. Those on fixed mortgages are ok for the time being, but anyone due for remortgage soon should put talking to a mortgage adviser to the top of their list.

Is this the new normal?
For those that are new to the housing market (those who have bought in the last 10 years) the consistent hikes have been a shock. However, it’s important to note that these homeowners have gone through a very abnormal period when it comes to rates.

To see banks offering rates of less than 2% is rare. The COVID-19 pandemic had significant knock-on effects to consumer spending – no one was allowed to go out and thousands of businesses stopped running. This in turn greatly weakened the economy. To try and support economic activity as much as possible, the Bank of England slashed interest rates to 0.1%.

A ‘normal’ mortgage market by today’s standards should see rates of between 4% and 5%. While we’re seeing some lenders go above this rate, the UK average five-year fixed rate (based on 75% loan-to-value) currently sits at 4.78%. Two-year fixed increases to 5.35%.

SVR is above its usual average, and we’d hope to see this come down as the economy begins to stabilise. However, with fixed-rate mortgages, it’s likely this is where they will stay for the foreseeable future.

Our advice
If you are on a standard variable rate, now may be a good time to consider remortgaging to a fixed-rate deal, which could help you secure a more stable and potentially lower monthly payment for the duration of the fixed term. If you are on a fixed rate and due to remortgage in the next six to nine months, it is worth speaking to your lender or broker now to have the best chance of securing the most cost-effective deal.

We understand that changes in the base rate can raise questions for both borrowers and savers. If you require advice on mortgages and savings, please do not hesitate to get in touch with us. Our team of experienced professionals are here to help you make informed decisions and navigate the ever-changing financial landscape with confidence.

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