BANK OF ENGLAND RAISE INTEREST RATES TO 4.5%… WHAT DOES THIS MEAN?

Thursday May 11, 2023

The Bank of England has announced an increase of 0.25% to its Base Rate, making it the 12th consecutive rise and pushing interest rates to 4.5%, the highest in almost 15 years. This move is intended to tackle high levels of inflation, which remain above the Government’s target of 2%. The Bank anticipates that inflation will fall to around 5% by the end of the year and meet the 2% target by late 2024.

For homebuyers, the interest rate rise will likely lead to an increase in fixed-rate mortgages, which have slowly been edging up in anticipation of the Base Rate’s rise. Lenders set their fixed-rate mortgages based on the market’s view of what the Base Rate will be in two, five or even 10 years’ time. These are called ‘swap rates’. While it is unlikely that there will be any immediate changes in lender rates, they are likely to wait and see what impact the Bank’s comments on the outlook of the economy will have on swap rates.

The increase in mortgage rates could impact first-time buyers, who face affordability challenges in the property market. However, the high demand from homebuyers looking to move may lead to lenders remaining competitive to meet this demand and help first-time buyers purchase their first home. Skipton Building Society recently launched a 100% mortgage product aimed at a specific segment of the first-time buyer market.

For renters, the interest rate rise is not likely to have a direct impact on their rental payments. However, it could affect their ability to save for a deposit and purchase a home in the future due to the potential increase in mortgage rates.

The property market could experience a cooling effect due to the interest rate rise, as higher mortgage rates may lead to a decrease in demand from buyers. However, the demand for homes remains high, particularly in the first-time buyer sector. Thus, it is unclear how significant this cooling effect will be. It is possible that the market may continue to see fluctuations in the short term, but homebuyers may not see a significant change in the amount they need to repay each month.

Overall, the impact of the interest rate rise on the property market, renters, and homebuyers remains uncertain. However, it is clear that the Bank’s decision to increase the Base Rate reflects their forecasts of the economy’s future performance and attempts to tackle inflation.

the Bank of England’s next interest rate announcement is scheduled for Thursday 22 June.