As you have most likely seen in the news, interest rates have been steadily increasing throughout 2022. The Bank of England have raised the base rate from 0.25% to 1.75% over the last 6 months and this is expected to continue long into 2023.
Why are interest rates rising?
The Bank of England uses interest rates to control the economy and keep many factors in balance. One of their targets is keeping inflation at 2%. Since inflation is rising to unprecedented levels, the Bank of England is rapidly increasing interest rates to try and curb this rise. Now that inflation is over 10%, we are sure to see further interest rate rises to over 2% in 2022 and possibly over 3% during 2023.
Small levels of inflation is actually desired within an economy, which is why the Bank of England would like it at 2%. This shows the economy is growing at a sustainable level. Usually, higher levels of inflation show the economy is growing too quickly, meaning the public are spending large amounts. Therefore, in those times, raising interest rates creates an incentive to save money rather than spend, and means those with a mortgage have less disposable income so cannot spend as much.
But these are not normal times. The high inflation we are currently experiencing is due mainly to the war in Ukraine and supply shocks from Covid. Our situation domestically is not one of high public spending and fast economic growth. Therefore, interest rates are rising to stop high spending that isn’t there, and to reduce growth that we do not have. That is the problem facing the Bank of England, and why we are likely facing a recession (negative economic growth) by the end of the year.
How is my mortgage affected?
The answer to this depends entirely on which type of mortgage you have.
Those people on a fixed rate mortgage will not experience any change to their monthly repayments. The idea of a fixed rate is so stay the same for the term of the product, which may be 2, 3, 5 or even 10 years. If you are unsure of your term then look through your mortgage paperwork or contact your lender. Your repayments are fixed at the same level. If you started your mortgage in 2021 or before, you will likely be fixed at the low levels we were seeing prior to the issues seen in 2022. It is worth noting that you can start to look at remortgaging six months before your term ends, so if you are nearing the end of your fixed term then start considering a new fixed term before interest rates rise even further.
Anyone on a discounted, variable or tracker mortgage will be seeing increases to monthly repayments. There is often a small delay of around a month before lenders reflect base rate rises into their variable rates. In September, most lenders will have factored in the latest interest rate rise of 1.25% to 1.75%. The frustrating aspect of higher monthly repayments in this situation is that all of the rise is paying more interest, and not paying off any more of your loan. It would be beneficial to look for new fixed rate deals. Although they may appear high at the moment, they will look like a very good deal in 6 months time when interest rates are even higher.
What if I don’t have a mortgage yet?
If you are looking for a mortgage at this point, you will likely be feeling hard done by that you could not have secured one before all of these increases. However, it is going to get worse before it gets better, so you are still best to lock in on a fixed rate deal as soon as you can. With interest rates expected to potentially double in the next 18 months, you will feel very happy if you are enjoying a fixed deal at the current rates for 2, 3 or 5 years.
We can help you with finding the best deal and will make your priorities our priorities. Being fully independent, we can search the entire market and are not tied to any particular lenders. Get in touch with us today for your free initial consultation. In this meeting, there is no obligation to proceed, we will just get to know each other better so you can make an informed decision on whether you would like to use us to source your mortgage.