Will mortgage rates go down? How rising interest will affect loans as rates expected to rise to 5.25%
The Bank of England is expected to raise interest rates for the 14th consecutive time this Thursday.
Markets are currently predicting a rate rise from 5 per cent to 5.25 per cent, although a larger hike to 5.5 per cent has not been entirely ruled out. Either would be the highest rate in 15 years.
Most economists polled by Reuters last week suggested rates would go to 5.25 per cent, before peaking at 5.75 per cent later this year, but others have suggested a more dramatic rise is possible.
“We believe the MPC will still want to send a strong signal on inflation,” said economists at HSBC, who expect a rate rise to 5.5 per cent.
Here’s what a hike to either level would mean for your mortgage.
Tracker mortgages would go up in price immediately and variable rates would likely follow
If interest rates increase this week, then some mortgages will go up in price immediately.
Tracker mortgages, which directly ‘track’ the interest rate, will increase in line with the base rate.
Someone taking out a £200,000 mortgage on a tracker at 6 per cent would currently pay £1,289 per month, and if the base rate increases by 0.25 percentage points, this would go to £1,319 per month – a £30 a month increase.
A 0.5 percentage point increase would lead to monthly payments going up to £1,351 – a rise of £62 per month.
Standard variable mortgage rates do not always go up directly in line with the base rate, but usually do.
The average standard variable rate mortgage currently sits at 7.67 per cent, so someone with a £200,000 mortgage on this rate will be paying £1,501 per month.
This would increase by £32 per month to £1,533 if the rate went up by 0.25 percentage points and by £65 per month to £1,566 if the rate went up by 0.5 percentage points.
What will happen to fixed-rate mortgages is less clear
Fixed-rate mortgages do not follow the Bank of England interest rate in the same way as other types of mortgage.
If you are on a fixed-rate deal currently, then your monthly payments won’t change until the deal expires.
New deals tend to be affected by long-term predictions of what the Bank of England interest rate will go to, rather than altering immediately after any increases.
Experts suggest that a rise of 0.25 percentage points this week will see the rates of fixed mortgage deals “hold steady,” because this is the increase that markets are expecting.
Lee Gathercole of Rebus Financial Services said: “We have seen some lenders drop interest rates in recent weeks, but I do think lenders have already priced in a marginal rate rise like 0.25 so I wouldn’t be surprised if we see rates hold steady or drop very slightly in the coming weeks.”
However, there have been suggestions that if rates go up by 0.5, then fixed-rate mortgages could increase further, because this would be beyond current market expectatations.
“If the base rate is hiked up more aggressively by a further 0.5, we may see mortgage rates shift up a little bit,” said Ben Tadd, director at Lucra Mortgages.
Inflation and food prices starting to ease
Inflation dropped by more than expected in last month’s data, falling to 7.9 per cent in the year to June, according to the latest figures.
The rate of Consumer Prices Index (CPI) inflation decreased to 7.9 per cent in June from 8.7 per cent in May, a fall greater than many were expecting, though core inflation which does not include energy and food prices, only fell marginally to 6.9 per cent from 7.1 per cent a month previously.
This decreased the chance of a higher rate rise on Thursday, as rate rises are used as a tool to get inflation down.
New data released today has also sown that food inflation is continuing to fall.
Figures suggest food price inflation has gone to its lowest level this year as prices of oils, fish, and breakfast cereals fall.
According to the British Retail Consortium (BRC) and NielsenIQ retail analysts, food inflation slowed to 13.4 per cent in July from 14.6 per cent in June.
.jpg)
