BANK OF ENGLAND SET TO ANNOUNCE INTEREST RATE DECISION: HOW WILL THIS IMPACT YOUR MORTGAGE?

Thursday May 4, 2023

Will interest rates rise, and what could this mean for mortgages?

If you’re thinking of buying a home or are coming to the end of your current mortgage deal, you might be wondering what’s going to happen to mortgage rates over the coming months. In this article, we’ll explore what’s driving interest rate changes, how this could impact mortgages, and what borrowers can do to navigate the current environment.

What’s driving interest rate changes?

The Bank of England’s Monetary Policy Committee (MPC) meets around every six weeks to vote on whether to change its Base Rate, which affects how much people can earn on their savings and how much they pay to borrow money, including for mortgages. The Bank sets an inflation target of 2%, and it has raised interest rates to 4.25% in an attempt to lower high levels of inflation. The Bank is expected to announce its next decision on interest rates on 11 May 2023.

According to market expectations, the Bank is likely to increase rates again in May, potentially by 0.25% to 4.5%, as the UK inflation rate remains high at 10.1% in the year to March. However, food and energy costs are set to come down, and inflation is expected to fall by the end of the year. Experts say that it’s possible that we could see the Base Rate peak at around 4.5%, as the Bank continues to monitor the long-term impact of consecutive rate rises on lowering inflation.

How are interest rate rises affecting mortgage rates?

Although interest rates have been rising, this hasn’t necessarily translated into higher mortgage rates, at least not yet. In fact, average rates for mortgage products continued to fall during the first few weeks of April across most Loan-to-Value (LTV) ranges, as lenders competed for business.

Experts say that lenders have already factored in the market’s forecasted interest rate changes into their mortgage pricing, meaning that they have already adjusted their mortgage rates before the Bank’s decision. However, in the past fortnight, experts say that they’ve started to see average fixed rates edge up slightly across most LTV ranges in response to a lower-than-expected fall in inflation in March.

Looking ahead, experts say that fixed rates may continue to increase a little over the next week as lenders anticipate a Base Rate change on 11 May. However, they’re likely to try to keep rates steady, particularly in the first-time buyer ranges, as they continue to compete for homebuyers’ business.

How could different types of mortgages be affected?

If you’re on a fixed-rate mortgage, your payments won’t change, at least until the end of your current deal. But if you’re on a fixed-rate product that’s coming to an end in the next six months, experts say that you might want to see whether locking in a deal now could be a good option for you. As the cost of borrowing is a lot higher than it was five or even two years ago, it’s likely that you’ll be offered a higher rate, and with that, higher monthly repayments. A mortgage broker or your lender’s mortgage adviser will be able to advise you on which options best suit your personal circumstances.

If you’re one of the estimated 15% of mortgage holders on a tracker or variable mortgage, you’ll see your monthly payments go up fairly instantly. This is because tracker mortgages are normally set against the Bank’s interest rate, plus a percentage.

A benefit of a tracker or variable mortgage is that you may see your monthly payments start to drop after rates have reached their peak and start to come down.

When could interest rates start to drop?

According to experts, interest rates are likely to peak at around 4.5% before they start to come down. The Bank of England’s Monetary Policy Committee meets approximately every six weeks to discuss and vote on whether interest rates should go up, down, or stay the same. While there is no fixed timeline for when rates may start to decrease, experts predict that it could happen once inflation is brought under control and the economy stabilizes. The Bank of England’s quarterly analysis on the UK economy and inflation projections, which will be published in May, may provide more clarity on the potential trajectory of interest rates in the coming months.