On the 2nd November the UK saw a doubling of the Bank of England base rate from 0.25% to 0.5% and whilst this is deemed to be a miniscule change, it marks the first rise in borrowing costs for a decade. Could this be the spark which initiates further increases in the UK interest rates?
We all understand the basic functions of interest rates; to reward consumers for saving their money whilst also implementing additional costs to borrowing, whether it is to finance a mortgage or generally any other unaffordable expense. However, amid fears of an ‘inflationary Brexit’ , with inflation (CPIH) figured at 2.8% in September this year, Mark Carney saw the need to increase interest rates in order to ensure inflationary pressures don’t exceed the Bank or England’s target of 2% (+/- 1%). With the prospects of mortgage payments increasing so abruptly, it is important that we analyse the variety of impacts that this interest rate rise could pose to UK citizens.
A mortgage is a loan to finance the purchase price of a property, where a bank or building society legally agrees to lend money at interest to enable this transaction to commence. The property remains under the ownership of the bank until the mortgage is paid off in full.
8.1 million households are currently with a mortgage in the UK, with 3.7 million (46%) of them on a standard variable rate, which moves in accordance with the official bank rate, meaning a rise could impact a significant number of households across the nation. Whilst this is many people’s immediate perception of a doubling in the base rate of interest, payments are only expected to increase by around £12 a month, illustrating how it may not pose a great threat to people’s finances (unless they own several properties).
Also, with 57% of homeowners currently on fixed-rate deals, their monthly payments will remain the same, irrespective of the rise. However, many are on relatively short-term contracts, meaning when their two-year fixed come to an end, they can expect higher payments. This means that the doubling of the interest rates may potentially pose more troubling effects to society in years to come.
Halifax have also issued a statement regarding the continuous rise in UK house prices, which have reached a record high of £225,826, creating concerns as to whether the rise in interest rates will make houses even more unaffordable than they currently are. However, Russell Galley, the managing director of Halifax Community Bank stated on the 7th November, "We do not anticipate the base rate rise will be a barrier to buying a house”.
We will have to see in months to come whether home ownership continues to rise regardless of the increase in the interest rate, or whether it soars in response to citizens being incapable of financing their properties and mortgages.
It is expected that a rise in the base rate would encourage citizens to save more of their money. Many banks have responded to the 0.25% rise in the interest rate by passing this on to their savers. Nationwide have stated that majority of savers will see improvements, and the Newcastle Building society have agreed to pass on the rate rise to all of its savers, however most banks tend to raise mortgage rates immediately, with rises in saving rates tending to come later, meaning any increase in savings don’t tend to occur immediately.
Finally, are interest rates expected to rise even further in the future? Mark Carney has stated that the Bank of England may lift rates twice more over three years, in response to unemployment reaching a 42 year low, as well as rising inflation and relatively strong growth (expected to reach 1.7/1.75% by the end of the year).
Whilst at the moment there isn’t much to fear from these rate rises, if the Bank of England decide to substantially increase rates over the next year or two, then there is a possibility of the implications on mortgage repayments becoming unaffordable.