What is the impact of the latest rate rise?

There has been another increase in the UK Bank of England Base Rate. It has been expected, but it has still come as unpleasant news for millions of borrowers. But why has it been necessary – who will be impacted by it – and what can you do if it means financial problems for you?

At Continuum we’re looking for the answers.

What has happened – and why?

The good news is that financial experts have admitted they were wrong about the UK  heading for recession.

So wrong, in fact, there are now concerns that the economy may be overheating. Inflation -which can be a result of economy that is out of balance – may have fallen in recent months but is refusing to go away.

The Consumer Prices Index (CPI) rose by 10.1% in the 12 months to March 2023, down from 10.4% in February and from a recent peak of 11.1% in October 2022, fed by the highest grocery inflation for 45 years.

The Bank of England needs to drive inflation down to its target of 2%. The Bank’s Monetary  Policy Committee is concerned that the economy is accelerating out of control and inflation with it. Upping the Bank Rate has the effect of putting the handbrake on the economy. With inflation still above 10% and well above the 9.2 % forecast in early February the Bank had little alternative than to pull the interest rate lever again, for the twelfth time in a row. 

An increase from 4.25% to 4.5% was announced at noon on May 11th, with immediate effect.

What does it mean for you?

On the face of it a 0.25% increase does not sound too drastic and actually leaves the UK with a bank rate that is still lower than historic averages. But it is painful for those who have been relying on cheap lending, and a Bank Rate that stood at just 0.1% in December 2021. 

The first to feel the impact will be around 850,000 mortgage borrowers with a tracker rate mortgage. The average borrower will be paying around £25 per month extra.

Those on variable mortgages – around 1.4 million people – will be next in line. Their lenders will put rates up in short order, but how much may vary. There is no automatic tie between the Standard Variable Rate offered by mortgage lenders and Bank Rate, other than an inevitable increase when the Bank acts.

Those on fixed deals, where the interest rate stays the same for a set period usually as an introduction to the deal will see no immediate increase – but will have to be prepared for a significant increase in repayments if their deal is close to ending.

The overall message is – the increase will mean it will cost you more to buy your home.

What about the effect on the housing market?

At the beginning of the year, the same pundits who were predicting recession were also certain that house prices would fall as interest rates rose.

There have been blips within the housing market, but the forecast price falls have simply not occurred. As the pundits proved, it is impossible to predict the future, but it may be reasonable to assume that this latest rate hike will not be the one that changes the position.

A shortage of housing, and an economic outlook that is actually more positive than previously could mean that a house price collapse is unlikely.

What next?

If inflation doesn’t ease as anticipated we may see further base rate rises becoming necessary. Some forecasts suggest that the Bank of England base rate could reach a high of 5% later this year.

It might make sense to look at your mortgage arrangements with this in mind. There could be a window of opportunity to switch to a fixed rate which could give you some certainty about repayments over the next few years.

At Continuum we know the entire lending market, and if there is an opportunity to reduce your monthly repayments by remortgaging, we can help you secure it.

If the rate rise has made your current mortgage a challenge, or if you are coming to the end of a fixed rate deal, call us today.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage product, you should seek independent financial advice before embarking on any course of action.

Your home may be repossessed if you do not keep up repayments on your mortgage. 



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