For the longest time, the Bank of England (BoE) base rate was set at historical lows. Homeowners enjoyed low borrowing costs for over a decade, but when the coronavirus pandemic hit, that changed. The base rate is often used as a tool against inflation and since inflation is nearing record highs, the Bank of England has raised the rate multiple times in order to curb it. Here’s why you should care about what’s happening with interest rates.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
What is happening with interest rates?
The Bank Rate sets the baseline for some pretty important financial elements. Movement in the base rate has an effect on savings interest rates, so whatever direction the rate trends, your savings will follow. Credit card and personal loan interest rates are affected, but perhaps most significantly is the impact the base rate has on the housing market.
Over the last few years, the Bank of England has raised the base rate in an attempt to keep inflation in check. After the coronavirus, the invasion of Ukraine, supply issues, and soaring energy prices, inflation is at an all time high and there is a full-blown cost of living crisis — so the BoE have had to try to keep up.
The idea behind raising rates is to encourage people to save money, rather than spend. Savings interest rates will follow the trend upward, but so will mortgage rates. They are encouraging people to borrow less because loans and credit are more expensive. Doing this will also help to deter the rise in the cost of everyday goods.
How do interest rates affect my mortgage?
Very simply, when the Bank of England raises their rate, banks will, too, and mortgages will become more expensive than they already are. Mortgage providers will pass the increased cost onto their customers, so then borrowers will be dealt higher monthly mortgage payments, deposits, etc.
If you’re on a tracker mortgage – a mortgage that tracks the Bank of England’s Bank Rate – your mortgage rate will always increase or decrease in line with any rise in the base rate.
If you are on a variable mortgage deal, it’s up to your lender’s discretion whether or not their rate will rise. The best way to protect yourself from rising rates, if you have this type of mortgage, is to move to a fixed rate. Locking in your rate for two to five years might help provide some stability in an otherwise unpredictable world.
If you’re on a fixed-rate mortgage, fluctuating interest rates won’t affect you for the time being. Your rate is locked so it won’t change, but be sure you know when your initial term ends so you can be on the lookout for a new mortgage deal.
What’s going to happen to interest rates moving forward?
Some financial experts predict that the base rate could rise to 4.5% in the early part of next year and even reach 6% at some point in 2023. Many people feel unprepared to deal with this situation and feel like they could struggle to pay higher monthly repayments as it will be a massive strain during a time when the cost of living is already high.
What can you do?
If you’re worried about what’s going to happen to your finances, get in touch with a financial adviser. They will be able to advise you on the best course of action if you’re concerned about defaulting on your mortgage or what you can do to take advantage of rising rates. Contact the experts at Dental & Medical Financial Services today.