Interest rates have risen from 0.1 to 0.25% and now, on the 3rd of February 2022, after months of trickled information and estimates from economic experts, the Bank of England has made the decision to push rates once more, to 0.5%. Analysts predict rates will soar to 1.25% by the end of 2022 but what does that mean for me and you?
It’s the first time Britain has had two rate rises in a row for 18 years - why?
As if the hike in energy prices wasn’t enough to leave renters and homeowners alike feeling slowly squeezed, the people of Britain have been given their first back-to-back rise since 2004. For savers, perhaps this news brings hope but for anyone not on a fixed-rate mortgage, the announcement may not be as welcome.
Inflation is up and when it keeps increasing, the cost of goods and services does too. So many are already pinched by the extra outgoings but to tame inflation, the Bank of England or the ‘central bank’ have increased interest rates once more to 0.5%.
Interest is what’s charged on your mortgage (or other forms of borrowing like a credit card), so securing a deal with low interest means that you pay less money for your loan.
Will a rise in interest rates make it more expensive to borrow money?
The BoE’s base rate is the rate that other banks and lenders pay to borrow from the central bank. If that rate increases, they have to pay more to borrow, so this rate is usually passed down to customers, with a little on top, affecting how much borrowers pay and savers earn.
Reports from The Telegraph indicate that four Monetary Policy Committee (MPC) members wanted to raise rates further, to 0.75% and that several had urged a rate rise back in December.
How does increasing the interest rate affect inflation?
When inflation gets too high, prices rise and the value of money decreases. A pound might have had the purchasing power to buy, for example, 6 bananas but when demand drives price, the cost of everyday goods and services increases. When it does so, past the rate of growth in wages, how much can be bought with that same pound decreases, to say 5 bananas.
Increasing interest rates could cool inflation by suppressing demand for borrowing and reducing spending.
If borrowing is more expensive, and lending becomes restricted, fewer people want to/can spend, demand decreases and inflation growth slows down. Or so economists hope.
“A judgement call that you got wrong”
It’s not just 50% of the MPC committee that wanted interest rates to rise sooner. Bank of England Governor Andrew Bailey faced MPs at the Treasury Select Committee, including chairman Mel Stride who disagreed with his previous decision to hold off on a rate rise.
When referring to his previous strain in raising rates to assess the effect of the end of furlough on the jobs market, Stride remarked to Bailey that it was a “judgement call that you got wrong”.
Are the drivers of inflation out of our hands?
As troops amass on the Ukrainian border and gas prices surge in preparation for suppression of supply, some question whether a rise in inflation is entirely unpredictable and therefore out of anyone’s control. Many wonder how taking more money away from people already struggling to pay for necessities is going to impact inflation and whether that’s a good idea at all.
Given that inflation rose to 5.4% in December 2021, the highest it’s been in 30 years, and house price inflation soared an eye-watering 10.2%, will a 0.25% rise in interest rates do much to deter an eroding economy?
Is increasing interest rates the best way to stop inflation growth?
Arguably, trying to tame inflation by encouraging the general public to reduce consumption and stop spending could be like trying to put out a fire in one room by lighting a match in the room next door.
Those without savings to fall back on during a period of economic uncertainty don’t have the luxury of waiting out price hikes and hoping that inflation will decrease from a potential peak of 7.5% in April 2022, back down to the BoE’s forecasted 2%.
Why is an interest rate rise bad if you’ve got a mortgage?
It doesn’t have to be. It depends on what type of mortgage a homeowner has but those with a variable rate will face mortgage payment hikes in line with rate rises.
According to the trade body UK Finance, 74% of mortgage holders have a fixed-rate mortgage, meaning they’ll be unaffected but 9% of households on variable rate mortgages could be exposed to rate rises.
What will happen to your mortgage after interest rates rise?
Ultimately, it’s up to the mortgage lenders to set their rates and they’ll decide whether to increase the rates attached to their agreements, meaning that those with a mortgage that tracks the BoE’s base rate could face higher or lower mortgage repayments.
Assuming banks and mortgage lenders pass on the rate rise to their customers, a homeowner with £250,000 left on their mortgage paying a variable rate of 3.31% could see their mortgage repayment increase by more than £600 per year.
Getting the best rate and mortgage agreement based on what we know now
If you have a mortgage with a variable rate, whether that be for a residential, commercial or buy-to-let property, you might want to ask a mortgage broker to compare your current contract with the rest of the market.
They can calculate the effect of any hypothetical rate rises and show you what other lenders could offer or whether your current lender has an alternative mortgage product that could be better for you financially.
Don’t settle with your current contract, whether you’re on a variable rate or a fixed rate, as sometimes, a remortgage deal elsewhere could save you money throughout the course of your term. It’s not always possible but it could be worth checking with a qualified and reviewed broker.
You can also read the full Monetary Policy report here for more information on interest rate rises in February 2022.