Are Interest Rates going up?

Reports of interest rates rising have emerged this past week with speculation that the Bank of England may increase base rate, currently at 0.10%, as early as next month. Governor of the Bank of England, Andrew Bailey, was quoted saying “it will have to act” in response to rising inflation and the natural conclusion is a base rate rise.

Interest rates have been at record lows for an extended period now. March 2020 saw two base rate drops in little over a week, just before the country entered the first of three national lockdowns. Base rate was first cut from 0.75% down to 0.25%, before being dropped again to 0.10% just days later. Now, over 18 months on and after an extensive vaccination programme, the noise from the relevant powers had been that the base rate would be kept low to facilitate consumer spending, aiding economic recovery. However, with inflation now on the rise, way above the government target of 2%, a base rate rise may be necessary to prevent inflation spiralling out of control.

If the speculation turns into reality, what effect is a base rate rise likely to have on mortgages?

For some time now, brokers have been quoted saying mortgage rates can’t go any lower, yet lenders have continued in the race to the bottom with multiple banks now offering interest rates below 1% for low loan-to-value mortgages. While it’s inevitable it will happen at some point, there are yet to be any significant signs that the tide has started to turn, and lenders are usually quick to react if they feel it necessary. As it stands, most major high street lenders are not increasing rates on their residential and buy-to-let mortgage products.

A rise in base rate would indeed cause mortgage rates to rise if this was maintained long-term. A substantial base rate rise is likely to leave mortgage lenders with a decision. Whether to “stick it out” and maintain relatively low rates if they believe it’s only short-term, or whether they follow suit and implement a significant rise themselves. On the flip side, small and consistent base rate rises over the next couple of years will almost certainly see lenders start to slowly increase mortgage rates too.

So, if we anticipate a rise in mortgage rates, what effect will this have on the housing market?

Just as increasing base rate helps curb inflation, an increase in mortgage rates would likely cause a pullback on rising house prices. This could help first time buyers getting on the property ladder – less preferable mortgage rates would deter investors meaning first time buyers face less competition. Naturally, a drop in demand would also lead to reduced supply as sellers can’t get as much for their property. Currently the housing market is incredibly busy and while these changes may mean it quietens down a little, it should remain busy over the near future.

Predicting interest rates is never an exact science. Long term changes are easier to map in line with traditional macroeconomic cycles, but short-term fluctuations are becoming increasingly harder to anticipate in an ever-changing landscape. Mortgage rates are low, and they have been low for a long time. If mortgage rates do rise in the coming year, they’ll almost certainly still be relatively low. 2022 will see change in the mortgage market but 2020 and 2021 have hardly been smooth sailing. If you want to speak to a qualified broker, want to know what rates are currently available and whether you could be saving money by securing a better deal, we’re here to help with free, professional advice.