Interest rate increase in the UK. How will it affect the mortgage market?

In today’s article, I’ll explain to you what to expect from the recent UK interest rate increase. You’ll also find out if the Bank of England latest decision has clearly influenced your mortgage choice. Due to the dynamic situation, I must emphasize that the article is created on November 5 and the information contained may quickly become outdated.

Interest rate increase in the UK. How will it affect the mortgage market?

What is the interest rate?

According to the Bank of England, the interest rate determines how much it costs to borrow money and what reward you can count on for saving it. (source: What are interest rates). In other words, it is a predetermined interest rate on interbank loans.

After the last increase, the interest rate in the UK is 5.25% (source: Bank of England). This does not mean, however, that when taking a loan, the interest rate will be exactly that. I have already written an article about the interest you agree to when taking mortgage. The interest rate only determines how much your bank will pay for borrowing the money needed to grant the loan, which of course affects your installment. 

Interest rate increase in the UK. Why did the Bank of England raise interest rates?

I will immediately point out that the Bank of England is not the only one raising interest rates. Exactly the same thing is happening in the United States or Poland. According to Reuters, the Bank of England expects inflation to rise, analyzing the situation in the United Kingdom and other developed countries.

The increase in interest rates means that some people and companies will not decide on a loan due to its costs, and many people will be more willing to save money on their accounts and deposits in banks. The “freezing” of the movement of money allows inflation to be curbed, which has now exceeded 10%. (source: Inflation). If you want to know more about interest rates, I recommend you articles by The Times and the Bank of England.

Is this the last raise?

It is not possible to clearly determine whether further increases are certain, but it is very likely. What’s more, Huw Pill, the BoE’s chief economist, warned that further rate increases may be necessary. (source:  The Times).

In order for interest rates in the UK not to rise, inflation would have to fall. Although this is only my personal opinion, I am afraid that the chances of such a development are very low. I base my conclusions on reports such as the one issued by EY. High energy prices continue to raise the cost of living in the UK.

How will the current increase affect my mortgage?

While the rate increase will affect holders of variable-rate mortgages the most, it will eventually affect everyone. It should be remembered that the period for which the interest rate is fixed is usually 2 or 5 years. If the next interest rate change date is in 2024, 2025 or even 2026, you need to be ready for higher instalments.

It is worth remembering the existence of remortgage. It is true that in my article on this subject I mentioned that it is often used when interest rates fall, but now it can also be profitable. You have no influence on the interest rate, but individual lenders have different margins, so there maybe a chance to get rid of at least some of the costs.

How will the current increase affect my mortgage?

Does a fixed-rate loan make sense now?

When I write about fixed-rate mortgages, I emphasized their popularity in the UK. It is likely that an interest rate hike will not change much in this matter, and assuming that the media such as Money to the masses are right, a fixed-rate loan taken out in November this year may be justified. Nevertheless, the UK interest rates are set by the Bank of England and it is up to this institution to make the final decision. Remember also that the macroeconomic situation in the world and the credit market are changing at a very high pace.

If you are thinking about a mortgage and do not know what options are the most advantageous, I cordially invite you to use our help. Extend Finance will help you choose one of the many mortgage options, and our advisers will explain all the details of the offer to you.