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When will UK interest rates rise again (or eventually fall)?

When will UK interest rates rise again?

Summary: The Bank of England (BOE), raised the base rate by 1% to 1.255% on 16 June. This was widely expected.

The Monetary Policy Committee (MPC), after the annual inflation rate reached 9%, was forced to increase interest rates. This is the highest level in over 40 years.

According to the BOE inflation will reach 10% by autumn. The market has already priced in rate further increases in 2022. Market forecasts that the Bank of England base rates will rise to well over 2.5% by 2023. It may even go as high as 3.3%.

Do you need to fix your mortgage rate right now?

You should fix your mortgage as soon as possible, based on the BOE base rate at 1.25% and market assumptions of additional interest rate rises in 2022.

You can lock in a lower rate even if your fixed-rate mortgage is due to expire in 6 months. This will apply when your fixed deal ends and you avoid any early redemption fees from your current lender.

The best fixed-rate mortgage deals are quickly lost if there is any sign that the BOE may raise interest rates again.

You must act quickly to get the best mortgage deal.

How the Bank of England base rates are set

Piggy coin bank lit by sunlight
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The MPC, a nine-member committee within the BOE that sets the BOE base rates, is responsible for determining the rate. The Bank generally announces its interest rate decision every six weeks. The Bank of England website has a complete schedule of decision dates. When a decision is made, minutes of MPC meetings will be published. These minutes can be used by investors to predict when interest rates will rise or fall in the future. They would be able to see which nine-person committees voted in favor of interest rates being increased, decreased, or maintained the same.

The Bank of England has made significant improvements to its base rate forecasting over the last few years. Mark Carney, former Governor of the Bank of England, originally linked the UK unemployment rate with the BOE base rates. However, he was replaced by 18 economic indicators that the BOE uses today under Andrew Bailey.

What time can mortgage rates be expected to rise or fall?

Female hand holds a wooden block with an upward arrow and down arrow, representing rise and fall.
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In recent years, the Bank of England has made many changes in relation to raising interest rates. Mortgage rates will rise and fall with interest rates. Here’s a quick summary of how we got here:

  • After the 2007/2008 financial crisis, the interest rates in the UK were reduced from more than 5% to 0.5% to support the economy.
  • Although there was much speculation that interest rates would rise in 2015, it didn’t happen. Inflation suddenly became negative. The BOE has an inflation target of 2% to ensure that an economy can grow at a healthy rate. The BOE did not raise interest rates because it tends to lower inflation.
  • The Brexit vote was a major game-changer. In the previous discussion, interest rates increased. The discussion turned to the possibility that there would be an economic recession as soon as the UK voted to leave the European Union. In an attempt to stimulate economic growth, the Bank of England became so worried that it cut interest rates by 0.5% to 0.25% in august 2016.
  • Despite all this, the UK’s economy was surprisingly resilient to the EU referendum. Many, including Theresa May, believed that the BOE was too aggressive in cutting interest rates.
  • In November 2017, the Bank of England increased interest rates for the first time in more than a decade.
  • The Bank of England increased the base rate of its bank from 0.5% to 0.755% as the economic outlook improved in August 2018. This was the highest rate in nearly a decade.
  • The COVID-19 pandemic prompted the BOE to reduce interest rates twice by March 2020. First, from 0.75% – 0.25%, then from 0.0.25% – 0.1%.
  • The BOE increased interest rates by 0.5% to 0.2% in January 2022, from 0.1% to 0.2% in December 2021. The BOE increased interest rates to 0.75% in March 2022.
  • BOE increased the base rate by 0.25 % in May 2022 and June 2022 respectively, bringing it up to 1.25%. This is the highest rate in 13-years. The BOE attempts to curb rising inflation, which has risen well beyond the BOE’s target of 2%. The market prices at a BOE rate base rate of more than 3.3% by 2023.

These indicators will help you determine whether interest rates rise or fall.

Young Woman calculating future interest rates.
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When deciding whether to raise or cut rates, the BOE relies on several economic indicators. It is important to understand the key economic indicators when predicting when interest rates and mortgage rates will rise. Here is a list highlighting the most important indicators to be aware of. In the short-term, however, the most important influence on where interest rates will go is the coronavirus’s impact on the UK economy.

  • The official target is far higher than the actual inflation and it is still on the rise. Inflation in the UK now stands at 9%. This is the highest level for 40 years. The official target rate of 2% is well over inflation, which was as low as 0.7% in March 2021. Also, the cost to live is much higher than it was last year. Although the BOE previously stated that inflation would not rise for long, it now believes it will. It expects to see 10% inflation in the next few months. This is why the BOE raised interest rates five more times between December 2021, 2022, and June 2022. It is likely to continue doing so in 2022.
  • Official support for low rates is gone – Minutes of the June 2022 MPC meeting showed that there was a split vote. Six members voted in favor of a 0.25% rate hike, while three voted for 0.5%. The bank base rate increased from 1% to 1.25 % because it was a majority vote.
  • The UK’s economy is struggling, having surpassed pre-Covid levels. The coronavirus pandemic has sent the UK into its first recession since 2009. The UK’s economy contracted 9.9% in 2020, which was the largest annual drop in history. The UK’s economy recovered by 7.5% in 2020 and is now back at pre-Covid levels. The strength of the economic recovery will determine the rate at which interest rates rise. The UK’s economy contracted unexpectedly in April 2022. This raises concerns about a possible recession. A weaker economic growth decreases the chance of an additional interest rate hike to prevent the economy from overheating.
  • The unemployment rate is on the rise again. In the three-month period ending April 2022, employment grew by 117,000. The unemployment rate increased from 3.7% to 3.8%. Interest rate increases are triggered by higher wages and significant employment numbers. However, the UK’s employment market and wage growth show signs of slowing.
  • The Bank of England reduced its 2022 GDP forecast from 5% to 3.755%. It believes that the UK’s economy will shrink by 0.25 percent in 2023, despite the recovery in 2021. The International Monetary Fund and the OECD also reduced their 2022 UK GDP forecasts from 5% to 4.7%.

These are the rules that can stop you from remortgaging

  • Remortgaging your mortgage or fixing it has become more complicated in recent years as stricter affordability rules have made it difficult. Lenders had to make sure borrowers could afford the mortgage even if interest rates rose.
  • Lenders didn’t have to use the stricter affordability tests when remortgaging. Some lenders did this, making remortgaging easier. Some borrowers are left without a choice, as lenders have eliminated this option. It is important to determine the impact of an increase in interest rates and get advice from a mortgage expert. It’s worth taking a few minutes to save money and lock in low rates while they’re still available.
  • Mortgage rules can prevent you from fixing your mortgage rate if interest rates rise. This could leave you with no option but to cancel your existing deal and have your mortgage repayments increase in line with the bank’s base rate or the lender’s discretion.

Step 1: Calculate the impact of your monthly mortgage payments.

worker hand using calculator at office
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  • This calculator will quickly calculate the effect of an interest rate increase on your mortgage payments. To see how interest rates rises could affect your monthly mortgage payments, simply enter the details of your original mortgage (e.g., the amount borrowed and the term)
  • Let’s say you borrowed £200,000 over 30 years at a rate 5%. However, the rate has dropped to 2.5% (the standard variable rate set by the lender). Enter the amount of the loan (£200,000 for repayment), the term (30 years) and the current interest rate (2.5%). Current base rate at the Bank of England is 1.25%. To calculate the impact on an increase of 3.75% to 5%, type 3.75% in the box titled “anticipated rate changes” and click calculate.
  • Calculating the interest rate rise results shows that my monthly mortgage payment would go up from £790 per month to £1,231 per month. This is an additional £441 per month you would need to find!

Using this method you can quickly determine how much your mortgage payments will change if interest rates rise.

Step 2: How to determine your options for mortgages

  • The new rules are not known by consumers, and could result in some people being left without a mortgage. Their mortgage payments will increase in line with the Bank of England base rates based on their lender’s wishes.
  • Many consumers mistakenly believe that a price comparison website is the best way to find a remortgage. Keep these points in mind:
    • Many mortgage deals can only be obtained through mortgage advisors. They don’t show up on price comparison websites.
    • Not everyone can afford the prices on price comparison websites.
    • Price comparison websites don’t take into account your credit rating and personal circumstances when deciding whether or not a lender will lend you money. You may not be eligible for some of the offers offered by comparison websites and they won’t know until you credit check. This will hinder your future mortgage applications.
  • It is almost always more beneficial to work with an independent mortgage advisor than doing it alone. This is why 70% borrowers use a mortgage advisor to get the best deal possible from a lender that will lend to them. We recommend that you get in touch with a mortgage advisor.

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When will UK interest rates rise again (or eventually fall)?
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MortgagesRM have a wealth of knowledge and experience when it comes to making decisions regarding your mortgage. If you are looking for advice on how you should move forward in these uncertain times, get in touch with us today and we will happily go through any questions you have. Face to face, over the phone or a home visit.

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