Bank of England Raises Interest Rates to 0.25%

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Despite conflicting data, the Bank of England raises interest rates to 0.25% deciding to raise its benchmark interest rate from 0.1% to 0.25%

With inflation hitting 5.1% yesterday, Unemployment falling, and a booming housing market where growth is running at 10% annually (according to Nationwide Building Society) there is certainly a lot of heat in the market.

However, that is also with the backdrop of GDP stalling to just 0.1% growth in October, increased restrictions since and the US Federal Reserve withdrawing stimulus as US inflation is at 6.8% who are also set to raise interest rates next year.

This was never an easy decision as whichever way they went they would have been criticised as perhaps moving rates as expected in November now looks like it would have been a more sensible move

What does this mean for Mortgage Rates?

Don’t get caught out on a Discounted Variable deal.

Any variable rate linked to the Bank of England will only move in line with changes the BoE makes, these are typically called Trackers and will update within a month of any change. What catches some people out are Discounted Rates, as these are typically linked to the lenders’ own Standard Variable Rate. While the vast majority of lenders move their Variable Rate in line with the Bank of England, they don’t always do that. It can be by less, but it can also be by more. The way people get caught out is that lenders often change their variable rate the month AFTER the BoE makes a change, which means you get loads of Discount rates topping all the best buy tables for a good few weeks after a change in the Base Rate simply as they have not caught up yet.

Therefore you need to look very carefully then at a few things such as:

  • When did the lender last update their variable rate?
  • What have they done previously?
  • How much more do you think rates will go up in order to see if it works out cheaper?
  •  

For these reasons, we feel they are best left alone. A fixed rate is simpler, and a Tracker rate is clearer. It’s a bit of an old-school practice with Discounted rates which are often used by smaller Building Societies but in a rising rate market, you are likely to see this until rates stabilize again, which could be a good few years by the looks of things.

Look at the margin between Fixed and Variable Interest Rates

This is always the biggest hint of where lenders think rates are going over the next 2 – 5 years. We have in recent weeks seen a lot of lenders introduce Tracker/Discount rates that are around 0.1% – 0.25% cheaper than the fixed rates they are offering. That is always a clear guide that rates are likely to rise, but more crucially, it can tell you by how much.

In a very simple example, if a 2-year Tracker is 0.2% cheaper than a fixed rate, lenders expect rates to go up by at least 0.4%, as it may start cheaper, then with a rise goes to the same level of the fixed-rate, but then another rise makes the Tracker more expensive. That way the lender collects the same level of interest (or more should rate go even higher) than on a fixed rate. So you may find picking a higher fixed rate at the start, may save you more money than a lower-priced Tracker.

As the Bank of England meets every 6 weeks, expect these to be more regular themes we will be looking at. The real test will be next year as if inflation does start to come back toward the 2% target level the Bank of England set, we could see more interest rate rises, or tightening of other fiscal stimuli until that has been achieved. Some analysts expect a steady and slow rise in interest rates well into 2023 so these are themes we will have to get used to from a mortgage perspective.

As the Bank of England raises interest rates to 0.25%ate, as ever, if you want to know what impact this has on you specifically, please get in contact with one of the team who will happily talk you through how best to navigate these themes based on your specific situation.