Almas Uddin
Founder and Mortgage Advisor
04 Jul 2023
On 22nd June, the Bank of England (BoE) raised base rates to 5%; the highest in 15 years. This news has caused concern about the interest rates consumers pay on borrowing, including their mortgages.
High base rates aim to bring inflation under control. In May 2023, inflation was at 8.7% - an improvement on the 40-year high of 11.1% in October 2022, but still a long way from the 2% target.
So, what does this mean? When is inflation (and interest) expected to fall, and what mortgage products will be affected by higher interest rates charged by banks and lenders?
The Link Between Inflation and Mortgage Repayment Costs
Inflation means that prices are rising. While a sustained level of growth is a sign of a growing economy, runaway inflation can make it hard for people to afford living costs. The BoE lifts base rates to try and bring inflation down.
Banks and lenders use the base rate as the basis for their lending, so the higher the base rate, the higher the interest rates charged by lenders, and equally, the higher the interest rates banks should pay out to their savers.
This most recent increase to the base rate will mean that:
- Some mortgages on a variable and tracker rate will cost more to repay each month – although fixed-rate mortgages will not be affected.
- First-time buyers may find it harder to secure a mortgage since the rates at which their affordability will be assessed are higher.
- Homeowners with a fixed-rate mortgage about to end, or those planning to remortgage, will find the monthly cost higher, especially when switching from a fixed-term deal with a low rate.
The good news is that the BoE has indicated it expects ‘inflation will fall significantly’ before the end of this year, which should mean interest rates reduce as the base rate is lowered in line with an improving economic picture.
Changes to the UK Mortgage Market in Light of Higher Base Rates
Mortgage lenders react to market pressures differently, but the increase in base rates also means the swap rates – the rates banks charge when they borrow through the wholesale market – have also risen.
Some lenders will reprice mortgage rates, particularly on fixed-rate mortgages, sometimes at very short notice to respond to announcements by the BoE or changes within the swap rate.
Others may withdraw products from the market, with Coventry, NatWest and Halifax announcing increases and Santander and HSBC temporarily removing all new borrower products. One of the important considerations for borrowers is that they are fully aware of these changes if they are partway through an application.
We recommend any borrowing applicant with concerns over whether a product has been or is likely to be withdrawn or keen to verify whether an offered interest rate still stands to get in touch as soon as possible.
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