The Bank of England raised interest rates on 15 December from 3.0% to 3.5%. The 0.50% percentage point increase marks the ninth rise since December 2021 when Bank rate stood at just 0.1%.
Volatility and uncertainty
- The cost of mortgages had already been climbing due to sterling volatility and market uncertainty, after September’s ill-fated mini-Budget, as well as the rising Bank rate. Major lenders all pulled deals and brought them back to the market at higher prices.
- The average cost of fixed rate deals across all deposit levels today is 5.23% (two-year fix), 5.27% (three-year fix) and 4.98% (five-year fix). This compares to highs of more than 6.50% in October.
- The most competitive deals are 4.69% for a two-year fix and 4.49% for a five-year deal. Currently, longer term fixes are cheapest with the best 10-year fixed rate deal priced at 4.04%.
- A settling political landscape alongside a slight fall in the annual rate of inflation to 10.7% could ease pressure on the Bank of England to raise interest rates further this year.
- The next decision to be taken by the Bank’s Monetary Policy Committee (MPC) is scheduled for 2nd February 2023.
Interest rates and mortgages
- So what do rising interest rates mean for the cost of mortgages so far?
- The estimated two million homeowners on variable rate deals, such as base rate trackers, will see an almost immediate rise in their monthly repayments following the latest Bank rate rise to 3.5%. As an example, a tracker rate rising from 4% to 4.50% costs around an extra £50 a month on a £200,000 loan.
- Those on fixed-rate deals, where the interest rate is locked in for, say, two or five years, won’t see any difference in their monthly payments. But when their deal comes to an end, they may find they have to pay a higher rate for their next mortgage because of recent increases in the main Bank rate.
Why are interest rates rising?
- The Bank’s MPC uses interest hikes as a means of cooling the economy and taming rising inflation. The Consumer Prices Index (CPI) measure of inflation rose to a heady 11.1% in the 12 months to October against a government target of 2%. And while in November it eased back to 10.7%, it’s still high enough to work interest rate watchers.
- If inflation remains stubbornly high, some forecasters are suggesting that Bank rate could reach 4.5% in 2023.
- One of the main longer-term drivers behind rising inflation is the cost of energy. Under regulator Ofgem’s energy price cap, annual bills for a typical-use household would have rocketed to £3,549 from 1 October, and further still to £4,279 from 1 January 2023.
- But the government has superseded the price cap with its own ‘cheaper’ Energy Price Guarantee (EPG). This limits typical annual bills to £2,500 until 31 March 2023, followed by £3,000 from 1 April 2023 for a further 12 months.
