Bank of England Increases base rate to 0.75% - What does this mean for your mortgage?

Updated: 3 days ago



On Thursday, the 17th of March, The Bank of England announced that the base rate increased a further 0.25%, from 0.5% to 0.75%.

This base rate will affect the cost of mortgages and has risen three times since December.

This decision was made in response to rising inflation caused partially to rising energy and fuel prices.


Firstly, what is inflation?

Inflation is of rising prices in the economy. Inflation means an increase in the cost of living as the price of goods and services rise. If the prices of goods rise, then the same amount of money will purchase a smaller quantity of goods.



How is it calculated?

Typically, to calculate inflation, the statistics authority (ONS) measures the price of 1,000 goods every month and it gives a weighting to different goods depending on how important they are.

Moderate inflation enables economic growth and steady adjustments for wages and other goods.

Steady, sustainable growth is great for every economy and is what the MPC try to achieve by balancing the see-saw that is inflation and base rates.



Who makes the base rate decision?

The Bank of England’s Monetary Policy Committee (MPC) meet 8 times a year to set the base rate, and on this occasion, they voted by a majority of 8-1 to increase the base rate by 0.25%, taking the base rate to 0.75%. This decision was made in response to CPI inflation rising to 5.5%, which is above the banks target of 2%. The bank is predicting that inflation could rise as high as 8% in the second quarter of the year.

The MPC will meet again to announce whether the base rate will move again on the 5th of May.



Why does the base rate matter?

Simplistically, banks will not always have their own money (customers savings) to lend out. Sometimes they will borrow from the Bank of England and add a margin on top for retail customers.

If the base rate is higher, lenders will be charged more which will then lead to higher costs being passed on to customers in the form of interest rate rises when on a variable rate or higher rates when a client first enters the mortgage deal.

In theory, a higher base rate would mean mortgages become more expensive, but that’s not necessarily always the case and they’re not directly linked.



How could the base rate rise affect my mortgage?

Most of the time homeowners will have opted for a fixed-rate mortgage, which would see the rate stay the same for a set amount of time – this will most often be two or five years.

If you’re in a fixed rate you won’t be affected by the base rate change immediately if you currently have a fixed-rate mortgage, and you’ll continue to pay the same amount as you currently do until the end of your fixed term.

When your term is up and it’s time for you to remortgage, you may find that deals have become more expensive.

If you are on a tracker mortgage, which follows the base rate alongside a set margin, then your rate will instantly go up by 0.25% to match the base rate.

A discount mortgage will provide a discount on your lender’s standard variable rate (SVR). Any repayments of discount mortgages will not automatically go up due to the base rate rise, however it is highly likely that our lender will increase its SVR in the near future.



Will the base rate rise have any effect on mortgage rates?

During the second half of last year mortgage rates fell significantly, and at one stage we were even seeing more than 100 sub-1% mortgages available. In recent months these have disappeared after rumours of rate rises started to spread.

Since the first base rate increase in December, mortgage rates for those with large deposits have considerably risen, but for 90% and 95% mortgages, there hasn’t been too much impact.

This base rate rise is unlikely to cause the cost of fixed-rate mortgages to increase, as lenders had been preparing and increasing their prices in expectation of a base rate rise.

Typically, a 0.25% increase could see monthly payments increase by £25 per month based on a £200,000 mortgage over 25 years*



Conclusion

The base rate rise would not have come as a surprise to lenders, and they were already prepared with increased prices. If you already have a fixed-rate mortgage, then you won’t be affected by the rises and will continue to pay your current rate until your term ends.

If you are on tracker mortgage, then you will be paying slightly more month per month as they follow the Bank of England’s base rate.

If your mortgage is currently on a Standard Variable Rate (SVR) it’s likely that as rates rise so as to keep pace with the base rate

If you are still worried about how this may affect you, get in touch and we’ll give you some advice to make sure we can give you peace of mind.



*(This is based on a £2000,000 mortgage over 25 years comparing a rate of 1.99% against a rate of 2.24%)


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