Why recent interest rate rises are yet to be fully felt

Since the 3rd of November, the Bank of England have raised the base rate twice, from 2.25% to 3.5%, which is the highest rate since before the financial credit crunch in 2008. The reason for these decisions is to attempt to curb the UK’s soaring inflation rate, which remains in excess of 10%.

However, contrary to many headlines about interest rates, the mortgage market will not be as dramatically affected as they would lead us to believe.

Yes, there are those homeowners with tracker rate mortgages who will feel the effect of this rate increase, of whom, there are more than 700,000. All will have seen their mortgage payments rising at the start of December and again in January after the most recent base rate decision.

Across the UK, there are however, over 10m households with attached mortgage debt so the vast majority of the population with mortgage finance have opted to take out fixed rate products, providing them with the certainty of payments for a set period of time. As a result, those who are on these fixed products, will not see any change to their mortgage payments following the Bank of England base rate rise.

Those who will be getting nervous about the current market as those who will see their fixed mortgage rates expiring in 2023, of whom, there are around 1.8m, almost all will face some kind of increase in rate compared with what they have enjoyed for the previous few years – of that, there is no doubt.

The nerves of these households will certainly have been tested by the now infamous mini budget of the 23rd of September 2022, where proposed tax cuts and increased borrowing led financial markets to suggest interest rates of 6-6.5% would be needed to pay for the additional borrowing the country would have incurred.

Since the appointment of a new prime minister (who had also previously been the UK’s chancellor); the unwinding of almost all of the proposed tax cuts proposed on the 23rd September; and the suggestion that there would be budget cuts rather than additional borrowing, the markets have been given reassurance and predictability about future plans, which they crave.

In addition to these announcements, we also heard more doveish comments from the Bank of England in the November meeting suggesting that they feel there may be less need to raise rates as significantly than in October’s announcement; and that the rises may not last for a long as anticipated. The latest economic predictions for the base rate are no longer seeing base rate exceeding 6%, but rather now predicted to be peaking somewhere between 4 and 5% – a dramatic change to the outlook in a very short space of time.

As well as with this outlook that interest rates will peak lower, there is also a suggestion that they may then look to be reduced sooner than had previously been expected in an attempt to support future economic growth. This, therefore, lowers the cost for lenders to borrow money and reduces the rates that they can subsequently offer.

The most important point to note is that all future rate rises have already been priced into the mortgage rates that are currently on offer and even when the base rate rose by 0.75% in November and a further 0.5% in December, there was very little market reaction as it was all anticipated and priced in accordingly.

It is taking time for these reduced borrowing costs to filter through across the board, however they are reducing none the less with new market leading rates for both 2- and 5-year fixed rates now below 5%, down by over 1% in the space of a few weeks.

So for those who have mortgage rates expiring in 2023, there will certainly be an increase in the new mortgage rates that will need to be taken out compared with that which is currently being enjoyed, however the predicted future Bank of England rate increases that are expected over the coming few months have already been factored into product ranges available, rather than seeing them increase each time the Bank of England announce any further rate rises.

The mortgage market has seen more changes in the last couple months than have been experienced over the previous few years with products and rates are changing every day. It is, therefore, more advisable than ever to seek professional mortgage advice if you have a rate expiring in 2023, especially if your rate expires before the end of June 2023. Even if you do secure a mortgage product early before your rate expires, be reassured that many lenders allow you to revisit the secured product before you complete to see if there have been any further reductions that you could benefit from.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Content correct at the time of writing and is intended for general information only and should not be construed as advice.

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