WILL INTEREST RATES RISE, AND WHAT COULD THIS MEAN FOR MORTGAGES?

Will Interest Rates Rise, and What Could This Mean for Mortgages?

As the Bank of England prepares to announce its next decision on interest rates, many potential homebuyers and current mortgage holders are wondering about the future of mortgage rates. The Bank’s Monetary Policy Committee meets every six weeks to determine whether changes should be made to the Base Rate and by how much. This rate is significant as it affects both the returns on savings and the costs associated with borrowing money, including mortgages.

Current Interest Rate Situation

In May, the Bank of England raised interest rates to 4.5%, marking the highest level in 14 years. This move was part of a series of twelve consecutive rate hikes initiated in December 2021 to combat high levels of inflation. However, despite the increase in the Base Rate last month, mortgage rates remained unaffected initially. It was the announcement of higher-than-expected inflation figures on May 24 that triggered a period of instability in the mortgage market, causing rates to rise rapidly.

Factors Affecting Interest Rates

To address persistently high inflation, the Government has set a 2% target for the Bank, which means that further interest rate hikes are being considered until inflation is under control. Although inflation decreased from 10.1% to 8.7% in May, it still exceeded market expectations, leading to speculation that interest rates may need to rise more than initially anticipated.

The stubbornly high inflation has also caused swap rates, the underlying costs of mortgages for lenders, to increase by approximately 1% since May 24. These increased costs are now being passed on to borrowers in the form of higher mortgage rates.

Predictions for Interest Rates

Current market expectations suggest that the Bank is likely to raise rates again in June. However, projections indicate that energy costs will decrease, and inflation is expected to fall to around 5% by the end of the year. Consequently, it is possible that the Base Rate may peak at approximately 5.75%, as the Bank continues to assess the long-term impact of successive rate hikes on reducing inflation.

Impact on Mortgage Rates

Average fixed rates have risen across all loan-to-value ranges over the past two weeks due to the underlying costs of mortgages increasing in response to a lower-than-expected inflation decrease in May. The direction of mortgage rates in the immediate future is likely to be influenced by the upcoming publication of inflation data on June 21. If inflation aligns with or surpasses financial market expectations, mortgage rates are expected to stabilize. Conversely, if inflation remains persistently high and additional Base Rate hikes are anticipated, mortgage rates are likely to rise further.

Considerations for Different Types of Mortgages

If you have a fixed-rate mortgage, your payments will remain unchanged until the end of your current deal. However, if your fixed-rate deal is expiring within the next six months, it may be worth considering locking in a new deal now. Borrowing costs are significantly higher than they were a few years ago, and it is likely that you will be offered a higher rate, resulting in increased monthly repayments. Seeking advice from a mortgage broker or your lender’s mortgage adviser can help determine the best options for your circumstances.

For approximately 15% of mortgage holders with tracker or variable mortgages, monthly payments will increase almost immediately. These types of mortgages are typically linked to the Bank’s interest rate, plus a predetermined percentage. One potential advantage of tracker or variable mortgages is that as rates reach their peak and begin to decline, monthly payments may start to drop.