Finance
It's fair to say that interest rates are a huge talking point in the current financial climate. When looking at the 12 months to April, inflation rose a staggering 9%, which puts further pressure on the monthly budgets of millions of UK homeowners with mortgages, who are already feeling the cost of living rising.
This large jump in inflation looks as though it is set to fuel the possibility of more rises this year, but what does that mean for you? We wanted to look at the market in a little more depth to see how mortgage interest rates can impact you.
Why are mortgage rates important?
Your mortgage interest rate determines the amount the balance of your loan will grow each month. A high interest rate will equate to a higher monthly repayment.
Those with repayment mortgages – which is most people – will pay a set amount of their balance each month plus interest. Those who have interest-only mortgages will pay interest but none of the capital. Although some interest only mortgages still allow you to pay off the capital but that is at your discretion and you are not bound to it.
When does the market think mortgage rates will next rise or be cut?
In June, the Bank of England raised the base rate from 1% to 1.25%, which was widely anticipated.
The Monetary Policy Committee was forced to raise interest rates as the annual inflation rate sits at 9.1%. This is the highest level for 40 years. They are now predicting inflation may hit 11% by the autumn, with more hikes looming. By the end of 2023, the market is predicting that the Bank of England base rate will potentially be as high as 3.3%.
What happens next with interest rates is indicative of key indicators, all of which are worth keeping an eye on. Whether they rise or fall, there are signs to look out for.
- Official support has evaporated – Six members of the Monetary Policy Committee voted for a 0.25% interest rate rise, while three voted for a 0.5% rise. As majority votes go, the bank base rate rose from 1% to 1.25%.
- The UK economy is still struggling despite surpassing pre-Covid levels – Contracting by 9.9% in 2020 during the pandemic, the UK economy saw its largest annual decline. In 2021, it rebounded back to its pre-Covid level by 7.5%. We did however, see a shrink in April 2022, which raised concerns that the cost of living squeeze may tip the UK into recession.
- Unemployment is once again rising – Rising by 117,000 in the three months to April 2022, employment grew. Unemployment rates though, grew for the first time in a year slightly from 3.7% to 3.8%. Strong employment numbers increase the chances of an interest rate rise, as do rising wages, but the UK market and wage growth are beginning to show signs of stagnating.
- Inflation is well above the official target – and still rising – Currently sitting at 9.1%, UK inflation is now well above the official 2% target rate. The Bank of England previously suggested this rise was temporary, but now accepts this is no longer the case.
What can you do now?
If at all possible, it is worth considering fixing your mortgage either on your existing property or if you are looking to buy. Even those on a fixed-rate mortgage with six or so months to go, you can still find a cheap rate now, so that when your current fixed deal ends, you can avoid any of those charges from your existing lender.
If we can encourage you to deal with the current climate in any way, it would be to think ahead. There is no harm in planning to secure the best deal for you.
What might stop you remortgaging?
Over recent years it has become slightly more difficult to remortgage and/or fix it. This is due to the rules surrounding the affordability tests when applying for a mortgage being tightened. Lenders always had to make sure borrowers could still afford to pay their mortgage if interest rates went up.
Simply remortgaging, new rules mean you can no longer simply apply the more stringent affordability tests, which is something lenders did to make it that little bit easier. This could leave some borrowers stranded on their existing deals, so it is important to calculate the impact of an interest rate rise and seek advice from a mortgage expert. These simple steps can help:
- Calculate the impact on your monthly mortgage repayments
This interest rate rise calculator can help you. All you need to do is enter the original details of your mortgage to see how they could change based on different interest rate rises.
- The best way to find out your mortgage options – Once you have calculated, it is much more effective to find an independent mortgage advisor, who can help you find the best deal from a lender who will actually lend to you. Many mortgage deals are only found through these advisors and will not appear on comparison sites, and not everybody can get the rates quoted on price comparison sites. These sites also don't take into consideration your credit rating or personal circumstances, which can determine a great deal.
There has never been a better time to check you are on the best mortgage product
From our experience of managing sales transactions we have carefully selected the most efficient, whole of market, financial advisors. Please click here to request a call back from a highly trusted independent broker. You are under no obligation to proceed beyond this stage. At worst, you will get confirmation that the deal you’ve been quoted is the best one for you. At best, you might find you can borrow more or make considerable savings on your monthly repayments.
