*This article was updated in August 2023 following the base rate decision. Some information may no longer be current.
The Bank of England has raised the base rate from 5% to 5.25%. Essentially, raising the base rate means that borrowing money is now more expensive than it was before.
Since the announcement, you’ll no doubt be wondering ‘why is this happening?’ and ‘what does this mean for me?’ We’ll cover these questions, and more, below.
If there’s anything we haven’t answered, please feel free to get in touch with us.
What is the Bank of England base rate?
The base rate describes the level of interest that lenders charge us for their financial products, such as loans and mortgages.
One of the Bank of England’s responsibilities is to keep the UK’s rate of inflation as low as possible. In order to do this, they keep a close eye on how the economy is performing, and the rate of inflation (the cost of living).
What causes mortgage interest rates to rise?
The interest rate is partly a reaction to supply and demand issues. When people aren’t spending much, and there is little demand for credit, the Bank of England committee often cut the interest rate in an attempt to increase the rate of inflation. Similarly, when people are spending lots of money, driving inflation up, the interest rate increases.
So when interest rates rise or fall, mortgage rates tend to follow suit. If a surge of inflation leads to the Bank of England increasing the bank rate, then you’ll find that lenders will also increase the interest rate on mortgages to combat the effects of inflation. Essentially, the two go hand in hand.
How will the interest rate rise affect my mortgage?
The interest rate rise may or may not affect you, depending on the type of mortgage you have.
Fixed rate
Generally speaking, if you’re on a fixed rate mortgage then you won’t see a difference in your mortgage payments.
But if you’re close to the end of your mortgage term, bear in mind that if you fall onto the lender’s standard variable rate (SVR), this could result in a rise in your payments.
If you’re not sure when your term ends, get in touch with your mortgage adviser and they can advise you on the next steps.
Tracker
A tracker mortgage usually tracks the Bank of England base rate, so you could see a change in your mortgage payments.
Standard Variable Rate
Those on a SVR mortgage may be affected by the change. You’ll need to check with your lender to see if they’ve changed the rate on your mortgage.
Is now the time to remortgage?
This depends on the type of mortgage you have and if it’s directly affected by the interest rate rise.
If it is, then you might want to consider remortgaging to a fixed rate product so you’ll be protected against any future rate rises.
When making this decision, we recommend you speak to a mortgage adviser. They’ll listen to your needs and give advice based on your individual circumstances.
If I am on a fixed rate, can I remortgage early?
Many fixed rate products include an early repayment charge as part of the terms and conditions.
This means if you remortgage before the discount period is over, you may have to pay a charge.
For example, if you took out a five-year fixed and wanted to remortgage after three years, you might have to pay the early repayment charge to redeem your existing mortgage.
So you may be wondering, is it worth paying the charge if you’re going to make a bigger saving by remortgaging early?
A mortgage adviser can help you work this out and make recommendations based on your circumstances.
Is there a chance of the interest rate rising again in the future?
The Bank of England has said that it’s likely there will be another interest rate rise, as inflation is likely to keep rising this year due to:
- Increase in prices of goods from abroad
- Increase in the cost of energy
A rise in interest rate depends on the economy and the rate of inflation over the next few years.
What should I do now?
If you’re on a fixed rate mortgage, check when your deal comes to an end and contact us if you want to remortgage earlier.
If you’re on a tracker or SVR mortgage, we recommend getting in touch with us straight away so you don’t end up paying more than you need to.
We can advise whether it’s beneficial for you to switch to a different mortgage product, taking into account your personal circumstances.
The main thing is, we don’t want you to pay more than you need to, and a quick phone call could help put your mind at ease.