As mortgage advisors in Somerset, we are always tuned in to the latest updates in the financial sector. It’s one reason we’re able to give the right advice to our customers. With that in mind, the continued base rate rises that the Bank of England have rolled out in 2022 are so significant that it requires explanation. Here, we go into detail on exactly what this base rate rise is, what it means for your finances, and how our friendly and professional Somerset mortgage advisors can help you.
- What Does The Bank Of England Base Rate Mean?
- What Is The Base Rate Now?
- How Is The Base Rate Set?
- What Does The Base Rate Rise Mean For Me?
- Will The Bank Of England Base Rate Continue To Rise?
- The Levels Financial Mortgage Advisors Yeovil & Somerset
- We Think You Should Know
What Does The Bank Of England Base Rate Mean?
Before we delve into the facts and figures and what they mean for your ability to secure a mortgage and by consequence, your plans for moving homes, it’s important to outline exactly what the Bank of England base rate is.
Put simply, the base rate is the rate that the Bank of England charges other banks and lenders when they borrow money.
By consequence, this directly influences the interest rates lenders will charge for loans, credit, and many types of mortgages they provide to customers, whether a first time buyer mortgage or those buying to let. As should already be clear, this could have a significant impact on how easy it is for people to find a mortgage they can afford, even with the help of a mortgage advisor.
It should be kept in mind that not all lenders will raise their rates in line with this base rate change, however, this does make it more likely that cheaper mortgages will be increasingly difficult to come by.
What Is The Base Rate Now?
As laid out on the Bank Of England’s website, on the 3rd of August 2022, the Bank of England base rate has risen for the 6th time in succession, increasing by 0.5% to reach a total of 1.75%. Perhaps the number alone may not sound too significant, but as reported by Bloomberg, this is the largest increase in 27 years. This latest increase should not come as a shock to anyone who has been keeping a close eye on the figures listed in the Bank of England database, as ever since the tail end of 2021, the base rate has been steadily increasing with startling rapidity. Take a look at these figures from the BOE’s database to get a sense of the full picture:
- 19th March 2020: + 0.1%
- 16th December 2021: + 0.25%
- 03rd February 2022: + 0.5%
- 17th March 2022: + 0.75%
- 05th May 2022: + 1%
- 16th June 2022: + 1.25%
- 4th August: + 1.75%
As should be clear from these numbers, base rate increases have become a regular feature, and it’s one many people attempting to secure mortgages are not going to like the look of.
How Is The Base Rate Set?
As Ulster Bank explains, the base rate is set by the Bank of England’s monetary policy committee (MPC) and announced on average once every six weeks, about eight times a year. The MPC’s nine members vote on what their monetary policy will be for the next time period, factoring in the current financial climate.
In the summary of this latest August meeting, the MPC primarily holds up inflation pressures as the reason for this most recent increase. The committee voted 8-1 to raise the base rate by 0.5% in an attempt to curb inflation, which is soaring above the 2% target at 9.4% as of June 2022 (reported by the office of national statistics). The only dissenting member, instead voted for a more modest increase of 0.25%, so it seems that with either outcome the base rate was still going to increase.
What Does The Base Rate Rise Mean For Me?
Understandably, concerned individuals are not going to be as interested in a financial history lesson as they are in an explanation of what the base rate rise means for their finances and mortgage in real terms. The answer is, of course, not cut and dry, and will vary considerably with what mortgage they have as well as other exterior factors. However, our Somerset mortgage advisors have simplified this as much as possible for our clients and have divided mortgages into four main categories based on what impacts this base rate rise will have on the finances of their holders.
Fixed Rate Mortgages
The first of these four groups is made up of those that are currently signed on to a fixed rate mortgage. This is the larger group of mortgage types, with UK finance reporting 6.75 million borrowers as on this type of mortgage, and comprising 75% of the mortgage market.
What Is A Fixed Rate Mortgage?
A fixed rate mortgage is a loan where the interest rate is fixed for an initial portion at the beginning of the loan (usually 2, 3, 5 or 10 years), meaning it does not fluctuate with market conditions. This type of mortgage is ideal for individuals who want predictability in their payments or who are looking to hold their property for the long term. However, the trade-off is that these often come at a higher starting interest rate to compensate for this consistency and, if base rates were to fall again, they would be locked in to paying the higher rates.
How Will Fixed Rate Mortgages Be Affected By Base Rate Rises?
Since the main draw of these loans is that they do not fluctuate with market conditions, those with fixed rate mortgages can breathe a sigh of relief as their payments should not be increasing as a result of these base rate increases. However, those looking to remortgage or facing the end of their contract will still need to exercise caution. Remortgaging to negotiate a new deal more in line with an individual’s current financial situation is very common, but this process may now be much more difficult. Those remortgaging in the current financial climate may find themselves looking at higher costs instead.
Variable Rate Mortgages
The second group is those who hold a variable rate mortgage. This Is Money reports a study by Habito which found 27% of people were on a standard variable rate mortgage. To put that into perspective, The Times reports that 1.1 million properties in the UK are on variable rate mortgages.
What Is A Variable Rate Mortgage?
In direct contrast to the above, a variable rate mortgage is a loan where the interest rate is not fixed. As explained by Money Helper, interest payments will vary with market conditions, typically being adjusted to a level above a specified benchmark or reference rate.
How Will Variable Rate Mortgages Be Affected By Base Rate Rises?
This group is likely to feel a direct impact from the Bank of England base rate rises. With a mortgage that fluctuates with market prices, many could see their payments increase. In fact, according to Which, a £200,000 mortgage could now cost an additional £592.92 each year should this latest 0.5% base rate increase be passed along in full.
Tracker Mortgages
While smaller than the other two groups, UK Finance reports approximately 850,000 borrowers in the UK have this type of mortgage, which is still a considerable number.
What Is A Tracker Mortgage?
A tracker mortgage is another type of variable rate mortgage, however, this type directly tracks the base rate of the Bank of England, as explained on Right Mortgage Advice’s website. This means that holders could see their repayments fluctuate on a monthly basis, depending on how rapidly base rate changes occur.
How Will Tracker Mortgages Be Affected By Base Rate Rises?
As you may already have guessed, this is the group most likely to see an immediate effect of the Bank of England base rate rise. With a mortgage that is linked to the base rate directly, it is an inevitable outcome. According to Money Saving Expert’s article, individuals with a tracker mortgage with a mortgage of £100,000 will see increases on their monthly payments of £27 as a result of this latest rise.
Prospective Mortgagors
Individuals who are yet to secure a mortgage find themselves in perhaps the best and worst position of all. Unlike those with mortgages already signed, they will not find themselves suddenly forced to make larger mortgage repayments than they can afford. However, the base rate rise will make it more difficult to find mortgages with low interest rates, particularly for people like first time buyers who may struggle to afford more expensive rates.
Will The Bank Of England Base Rate Continue To Rise?
Nothing is certain, however, it seems likely that there will be additional increases before we see the back of 2022. When we consider that the MPC’s report on their August meeting primarily pointed to rising inflation as a reason for this latest ride, and that in the same report they predict inflation will rise as high as 13% in the next few months, it seems likely that we will see further increases again this year. Potentially, as soon as the 15th of September, when the MPC next convenes. Figures like this make market’s predictions (reported by Money To The Masses) that base rates will reach over 2.6% before the end of next year, seem startlingly plausible.
If you are finding yourself looking at the calendar with growing concern, you are far from the only one. With The Guardian reporting that the average annual UK food bill has risen by £454, and that The Telegraph reports the energy price cap could go as high as £4,400 in January, it does seem like there is plenty on the horizon to be cautious about. However, when it comes to ensuring that your mortgage is giving you the most suitable rates possible in the current financial climate, there is one thing that can help you navigate these uncertain financial waters. Consult our expert mortgage advisors.
The Levels Financial Mortgage Advisors
While there is little one individual can do about the base rate rises, there are options to reduce the impact of it on your finances. With access to more than 12,000 mortgages from more than 90 lenders, mortgage advisors at The Levels Financial can help you navigate these uncertain times and help you get a mortgage that is the right fit for your financial situation.
The best way to learn your options and figure out how to get the right deal when applying for a mortgage is to talk to expert mortgage advisors. As was mentioned in the previous section, not all lenders will increase their rates equally following the base rate rises, meaning it is more important than ever to be selective with whom you choose to finance your mortgage.
Whether you are moving home, expanding your buy to let portfolio, or need a mortgage for any other reason, contact us today to arrange a free no obligation consultation on 01458 722 040 or by email at admin@thelevelsfinancial.co.uk.
We Think You Should Know…
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