How much will my mortgage go up? What happens if interest rates rise today and when they will go down
The Bank of England will announce its latest interest rates decision today, after Wednesday’s surprise drop in inflation.
Economists had expected Consumer Prices Index (CPI) inflation to increase to 7.1 per cent, off the back of rising fuel prices, but it actually declined slightly, from 6.8 per cent to 6.7 per cent.
Experts are still largely expecting the Bank’s Monetary Policy Committee (MPC) to raise the base interest rate by 0.25 percentage points, to 5.5 per cent, but a freeze is also not out of the question.
The MPC has increased the rate a record 14 consecutive times after upping it to 5.25 per cent at the start of August. Raising it to 5.5 per cent would make it the highest base rate since February 2008.
Interest rates directly affect people’s mortgages, as tracker mortgages follow the Bank’s base rate, while standard variable rate (SVR) mortgages generally do too. Here’s how the Bank’s decision today will affect payments.
Will interest rates go up?
Inflation can influence whether the MPC chooses to raise its base rate, which determines the rate at which it lends to banks.
The Bank generally raises rates to combat inflation. The logic is that if borrowing is more expensive, people have less money to spend and so there is less demand for goods and services.
Economists had largely expected an increase to 5.5 per cent on Thursday due to “exceptionally strong” wage growth data – and this is still likely to be the case – although there is a small chance of a freeze thanks to the lower-than-expected inflation figures.
Richard Carter, head of fixed interest research at Quilter Cheviot, said he leans towards the increase going ahead. “While this dip in inflation eases the pressure somewhat on the Bank of England to raise rates once more, it [is] likely [to] still remain poised to pull the trigger on another 0.25 percentage point interest rate hike,” he said. “If this proves to be the case, many will be asking when enough is enough.”
Ken Wattret, vice-president of global economics at S&P Global Market Intelligence, said: “All things considered, we still think it more likely than not that rates will rise again, but the latest inflation data suggest it’s certainly not the slam-dunk it looked a short while ago.”
Charles Goodhart, a former member of the MPC, said the inflation data put the decision “on a knife edge” and told i: “My guess is these figures might just tip it over into a pause.”
How could this affect mortgages?
UK homeowners on tracker mortgages can expect to be paying an average of £324 more per month than a year ago if the Bank raises the base rate to 5.5 per cent.
The average interest rate on a tracker mortgage is likely to hit 6.45 per cent, raising the monthly interest payment from £676.47 compared to £352.76 this time last year.
The average monthly interest rate on an SVR is likely to hit 7.75 per cent, meaning the average monthly interest payment will go up to £450 per month, compared to £312 last year.
The figures mean the average tracker mortgage holder will be paying an extra £3,884.52 per year, and the average SVR mortgage will cost an additional £1,656 per year, compared to a year ago.
The average interest payment for an SVR mortgage is lower than a tracker mortgage as the average amount borrowed by SVR holders is lower than the average amount borrowed by those with trackers.
A recent report commissioned by TotallyMoney found that nine of the 15 biggest banks and building societies already have SVRs that charge more than 8 per cent interest, including Virgin Money, Barclays, Lloyds TSB and Co-Op Bank.
Rate increases will not immediately impact people on fixed-rate deals – the majority of the 8.4 million UK households with mortgages – but they could mean their payments go up significantly when their deals end.
However, many high street lenders have been reducing their fixed-rate deals in order to get a leg up on the competition.
Barclays dropped selected two- and five-year fixed rates by 0.1 percentage points last week, while Halifax announced reductions of up to 0.5 percentage points on selected deals, including a five-year fix at 5.15 per cent.
Gary Bush, financial adviser at the Potters Bar-based MortgageShop.com, said: “The mortgage rate war is well and truly under way and it’s looking likely that there will be a busy end to 2023.”
When will interest rates go down?
Forecasts are not expecting rates to begin falling until at least the middle of 2024.
Mr Wattret said his organisation was forecasting that cuts would “begin only from mid-2024, given the need to bring inflation down markedly from current elevated levels”.
He added: “A swifter moderation in inflation than forecast could prompt a somewhat earlier easing cycle. Alternatively, should underlying inflation pressures prove more stubborn than expected, the UK would face a much more protracted period of restrictive monetary policy, with more severe implications for economic growth and house prices accordingly.”
BNP Paribas and the Centre for Economics and Business Research (CEBR) are also forecasting a cut to rates from summer 2024. Kay Neufeld of CEBR said current forecasting was pointing towards the June meeting in 2024 as the date of the first rate cut.
“This would coincide with our forecast for unemployment having reached its peak at 4.9 per cent and inflation having fallen below 4 per cent in March next year,” he said.
