November 7, 2022
On November 3rd, the Bank of England (BoE) chose to raise the base rate of interest for the eighth consecutive time. In the biggest single increase since 1989, the Monetary Policy Committee (MPC), which makes these decisions on behalf of the BoE, voted to set interest rates to 3%.
The main reason for raising interest rates is to curb inflation. The current rate of inflation is 10.1%, way above the BoE’s target of 2%. Put simply, inflation measures how prices for typical consumer goods are rising or falling. The BoE expects inflation to continue to rise over the next few months, before falling sharply in mid-2023.
Quick links:
How does inflation affect the base rate of interest?
How does the base rate of interest impact mortgage rates?
How the base rate of interest impacts tracker mortgages
How the base rate of interest impacts variable rate mortgages
How the base rate of interest impacts remortgagers
How the base rate of interest impacts first time buyers
How the base rate of interest impacts buy-to-let mortgages
How does inflation affect the base rate of interest?
There are a few reasons for the rise in inflation, and the subsequent predicted decline. The war in Ukraine has caused energy prices to surge, but these are likely to stabilise next year, in part because of the Government scheme to cap energy bills.
The price of imported goods has also risen, partly due to the war in Ukraine and the global effect on supply chains, and partly down to the disruption to supply chains during the Covid-19 pandemic. Production difficulties are already beginning to be overcome by businesses, meaning prices should level out.
Finally, the BoE expects there to be less demand for UK goods and services next year, which will also stop prices from rising so quickly.
Interest rates are used to help control inflation, so once inflation returns to an acceptable rate, we should begin to see lower interest rates too. Until then, we expect interest rates to continue to rise.
How does the base rate of interest impact mortgage rates?
When the base rate of interest increases, so does the cost of borrowing. Lenders use the base rate of interest, plus other factors, to determine what their rates should be. If it costs them more to lend you what you need for your mortgage, they will raise their interest rates to cover the additional cost.
If you are on a fixed rate mortgage, with several years still left before your deal runs out, you won’t be impacted until your product approaches its end. However, you will be affected if you have:
• A tracker style mortgage
• A variable rate mortgage
• A buy-to-let mortgage maturing soon
• Limited time before your mortgage deal expires
There may also be an impact for first-time buyers, depending on your lender and where you are in the process.
How the base rate of interest impacts tracker mortgages
Tracker mortgages are a type of variable rate mortgage which are tied typically to the Bank of England’s base rate of interest and are offered over a fixed period (typically two to five years). If you have a tracker mortgage, you will have already witnessed your monthly payments increasing.
It may be that you are coming towards the end of your current deal, which will allow you to move to a fixed rate mortgage if this is better suited to you or apply for a new tracker product with a new fixed term. If you still have some time left, but are concerned about repayments, we recommend speaking to our advisers to see if it would be worth remortgaging early.
Many of our clients prefer a fixed-rate mortgage because it provides them with assurance that their monthly repayments will stay the same.
However, tracker mortgages are most appealing when interest rates are falling. If there is a sharp decline in inflation next year, we would expect interest rates to fall too. It could be that there is an advantage to having a tracker mortgage next year, depending on your personal circumstances and your appetite for risk.
How the base rate of interest impacts variable rate mortgages
A variable rate mortgage is similar to a tracker mortgage but they are not typically directly tied to the BoE’s base rate of interest and there is no fixed period. The variable rate will differ but it is set by each lender and could be changed without any change to base rate. With some lenders, their variable rate is directly tied to base rate meaning they will change just like tracker mortgages. Homeowners will often automatically move into a variable rate mortgage when their original deal comes to an end.
Variable rate mortgages are typically the most expensive mortgage offering as lenders rely on borrowers falling into this type of mortgage and not seeking a new deal. If you have a variable rate mortgage, we recommend speaking to our advisers as soon as possible to secure the best deal for you.
How the base rate of interest impacts remortgagers
A record number of homes were purchased during the Covid-19 pandemic. This means that many homeowners will shortly be coming to the end of their mortgage deals and will be facing a very different mortgage market.
We know lots of people are concerned about the affordability of new mortgages and we recommend speaking to our advisers seven to eight months before you are due to remortgage. Mortgage offers are typically guaranteed for six months, meaning that you can secure a deal based on today’s interest rates, rather than risking further rises. Plus, if interest rates fall during those six months, we will still be able to ensure you get the best deal.
How the base rate of interest impacts first time buyers
If you have not yet submitted your application or secured a mortgage offer, it may be more difficult for you to pass affordability checks now that interest rates have risen again. This may mean that you will need to opt for a lower value property or increase your deposit.
However, we don’t anticipate that the latest change to the base rate of interest will lead to an increase in new mortgage rates. This is because most lenders had foreseen the hike in interest and had already made changes to their products. In fact, because Kwasi Kwarteng’s mini budget caused such panic, many lenders who reacted strongly to this may now choose to lower the cost of their products.
If you are hoping to buy your first home within the next 12 months, we recommend speaking to our advisers as soon as possible. This will help you to determine your affordability and obtain a mortgage in principle, which, in turn, allows you to be more competitive when submitting your offer.
How the base rate of interest impacts buy-to-let mortgages
Buy-to-let mortgages have faced some of the biggest rate increases, according to our internal data. Lenders are wary of rising costs for landlords and have significantly increased the stress-testing of lending for landlords.
Many landlords are struggling to refinance their buy-to-let mortgages, and those who can refinance are paying much higher rates. Rewinding eighteen months to two years, we would expect a client with a £150,000 buy-to-let mortgage to repay around £312.50pcm on an interest only basis. Now, this is likely to be around £701.25pcm.
This is leading many landlords to reconsider ownership and think about other investment options. Others may have to raise rents or reduce spending on maintenance and upkeep.
If you have a fixed rate buy-to-let mortgage which is coming to an end in the next six to nine months, we recommend speaking to our advisers at the earliest opportunity.
