How could changes in interest rates affect you moving forwards?

front of the TSB head office building in EdinburghAfter 18 months of low interest rates across the economy, there finally appears to be some upward movement in mortgage rates.

Indeed, the so-called “mortgage wars” may well be coming to a close, as lenders have slowly started to raise their rates.

Some media outlets are reporting rises across the board, leaving mortgage holders fearing the kinds of rises seen in the 1980s, when mortgage rates rose as high as 15%.

With so many opinions and analyst predictions flying around, it can be useful to take a look at what’s happening right now first, rather than trying to look into the future.

So, find out exactly what’s going on with interest rates currently, and how it could affect you moving forwards.

The Bank of England is unmoved – for now

By and large, interest rates throughout the economy are at least partially dictated by the base rate of the Bank of England (BoE), the UK’s central bank.

When inflation is low and the BoE wants to stimulate the economy, they can cut the base rate to encourage spending and lending.

This is exactly what happened in March 2020 when the BoE cut the base rate to its current level of 0.1% amid the height of the pandemic. This typically leads to a fall in mortgage rates.

Conversely, when inflation is on the rise as it is now, the BoE can raise the base rate to encourage saving rather than spending, reducing inflation in the process. This often sees mortgage rates rise.

Unsurprisingly, inflation has been the driving factor for the BoE’s discussions on what will happen next. But, for now at least, the central bank isn’t taking any direct action that will affect the market.

This was confirmed at a meeting of the Monetary Policy Committee (MPC), the BoE’s internal panel for reviewing the base rate, on 4 November.

This means that, although lenders can choose to raise rates on their products across the board, there’s little external pressure for them to change their deals.

Equally, this also means that those on variable- and tracker-rate mortgages could see their deals stay where they are for the time being.

However, FTAdviser also reported that the BoE has hinted that base rates could rise as high as 1% by the end of 2022.

This raise could have a serious impact on mortgage deals next year.

The market has priced in a rise

Despite the base rate not rising, there is some evidence across the market of a slight lift in rates.

According to FTAdviser, Barclays, HSBC, NatWest and TSB had all raised their rates by the end of October 2021 in preparation for a rise to the base rate that ultimately didn’t happen.

These rises are relatively modest – for example, TSB has risen its rate “by up to 0.4%” on its two-year fixed first-time buyer mortgage product.

Even so, these rises are seemingly little more than just a return to the rates that you would have seen 18 months ago, before the pandemic.

It’s worth noting that even the smallest rise in rates can be significant to your monthly and overall mortgage payments, especially if you aren’t on a fixed-term deal or even haven’t taken a deal yet.

According to Tortoise, a 0.15% rise in interest rates would add £33 a month to monthly payments of £2,345 on a £450,000 tracker-rate deal – equivalent to nearly an additional £10,000 over a standard 25-year term.

Of course, this would only be a concern for variable- and tracker-rate mortgages, with fixed-rate deals being unaffected until the end of the term.

The BoE could be wrong

Of course, despite having chosen to leave rates where they are for now, the BoE could be wrong about the long-term outlook on inflation.

The increased debt currently present in the economy alongside a strategy of “quantitative easing” – in which the BoE increases money supply by buying longer-term securities itself – could create an even more inflationary environment.

In turn, this could potentially force an even bigger rise to the base rate, triggering a larger-than-expected increase to rates.

Regardless, the chances of rates soaring like they did in the 1980s to upwards of 15% still seems unlikely.

There’s no time like the present

To sum up, the current state of play for interest rates is not entirely horrendous, as some mortgage holders have feared.

Rates are rising across the market, but these increases only appear to be returning to the pre-pandemic levels seen 18 months ago.

The key thing to remember is that when it comes to finding your rate, there’s no time like the present.

Indeed, when you look over the long term, mortgage rates are still historically cheap. As a result, taking a deal that’s higher than what was on offer last month could still represent good value compared to even two years ago.

Longer-term fixes currently available in the current market still look relatively attractive. So, if you’re in the market for a mortgage deal now, it may still be the right time to consider bagging yourself a cheaper deal.

Work with us

If you’d like help navigating the everchanging waters of interest rates, you could consider working with us at Edinburgh Mortgage Advice.

As mortgage brokers and experts, we can search across the market for you to find a mortgage deal that’s appropriate for your circumstances, no matter what interest rates are up to.

Email [email protected] or call 0131 339 2281 to speak to us.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home.

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