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Update on Base Rates, Rising Interest and the Impact on the Mortgage Lending Market

Update on Base Rates, Rising Interest and the Impact on the Mortgage Lending Market
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Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin04 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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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.