The Bank of England has raised interest rates by 0.5 percentage points to 4%, putting pressure on those with mortgages and businesses trying to pay off loans.
Chancellor Jeremy Hunt said the government “supports” the Bank’s action, but why have they raised rates and what does it mean for mortgages?
What does it mean for mortgage holders or those wanting a mortgage?
Well, there’s good news if you’re on a fixed rate, but not if you’re on a variable rate.
But first, let’s look at what the Bank of England has done.
Why has the Bank of England increased interest rates?
The Bank of England’s Monetary Policy Committee (MPC) voted for the 10th consecutive time to raise the cost of borrowing to a 15-year high.
The MPC sets monetary policy to meet its inflation target. The rate of Inflation currently stands at 10.5% – well above its 2% target.
The central bank has increased the interest rate in the hope of reducing consumer spending in order to tackle this high inflation rate.
Higher interest rates make it more expensive for people to borrow money and encourage people to save, which means people will tend to spend less.
If people spend less on goods and services then the prices of those things tend to rise more slowly, and slower price rises mean a lower rate of inflation.
Chancellor Jeremy Hunt said: “Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank’s action today so we succeed in halving inflation this year.
“We will play our part by making sure government decisions are in lockstep with the Bank’s approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone.”
Have interest rates reached a peak?
The Bank of England suggested that the tenth consecutive hike in interest rates could be the last for the time being.
It said that it would only raise rates further “if there were to be evidence of more persistent [inflationary] pressures” than already forecast.
The forecasts currently suggest that inflation has now peaked and that it will come down gradually this year and next.
Its central inflation forecast shows it thinks price rises will quickly reduce from December’s 10.5 per cent annual rate to below 4 per cent by the end of this year. Inflation is then predicted to drop well below the Bank’s 2 per cent target in 2024.
What does it mean for mortgages?
Those with mortgages – or hoping to get one soon – may be wondering what the increase in interest rates means for them.
A spokesperson from Expert Mortgage Advisor told FactCheck that due to several increases in the Bank of England base rate, there is “a lot of uncertainty in the mortgage market”.
They said this is because interest rates could further increase at later dates and that lenders are also “more reluctant than previous years to fix rates for longer periods of time”, such as ten year deals.
Lenders have also “tightened” their criteria, meaning mortgage approval has become “more difficult” when compared to the last five years, the spokesperson added.
They told us that this is largely because higher interest rates have made mortgages unaffordable to a greater number of applicants.
Martin Lewis, the Money Saving Expert founder, said the Bank of England’s interest rate hike would result in further problems for some mortgage holders.
He said those who are on deals linked to the Bank’s base rate will face hundreds of pounds of additional costs.
Writing on Twitter, Mr Lewis said: “Variable/tracker rate repayment mortgages will rise [around] £25/mth (£300/yr) per £100,000 of mortgage.”
But he noted that existing fixed rates “won’t change”.
This is echoed by the HomeOwners Alliance, who said the rates on fixed rate mortgages have fallen again, but for homeowners on their lender’s standard variable rate, rates are “soaring”.
Brian Murphy, Head of Lending at Mortgage Advice Bureau, said he urges anyone who is concerned about their ability to pay their mortgage or afford a new one to speak to an adviser, who will help them “navigate what may feel like an overwhelming situation”.
“It’s hard to feel positive at the moment, but all predictions suggest we are close to reaching the peak of the hikes – and all eyes will be on the next decision to determine whether interest rates have any further distance to climb,” he added.
The next announcement on interest rates is on 23 March 2023.