Understanding the rate rise, how it affects homeowners and what could happen next.
The Bank of England has announced an increase to the Base Rate, taking it from 3.75% to 4%. While a change of 0.25 percentage points might sound relatively small, it can have an impact on homeowners, people looking to buy their first home and anyone approaching the end of their current mortgage deal. But what exactly is the Base Rate, why has it increased, and more importantly, what does this mean for you and your mortgage?
At Fairway Mortgage Advice, we know that interest rate changes can sometimes feel confusing, particularly when there is so much information and speculation in the news. So, we've broken down what you need to know and what the latest announcement could mean for you.
What is the Bank of England Base Rate?
The Base Rate, sometimes called the Bank Rate, is the interest rate set by the Bank of England. It influences the interest rates that banks and building societies charge when lending money, as well as the rates they offer on savings.
The Bank of England uses the Base Rate as one of its main tools to help control inflation. Inflation is the rate at which the prices of everyday goods and services increase over time. When inflation is high, the Bank may increase interest rates to encourage people and businesses to spend less and save more. This can help slow down rising prices. On the other hand, when inflation is falling and the economy needs a boost, the Bank may decide to reduce interest rates to make borrowing more affordable and encourage spending.
The latest increase takes the Base Rate from 3.75% to 4%. Although this is a relatively small change, it reflects the Bank of England's efforts to manage inflation and the wider economic situation.
What does a Base Rate increase mean for the mortgage industry?
Changes to the Base Rate can influence the mortgage market, but it's important to understand that mortgage rates don't all move in exactly the same way. For people with variable-rate mortgages, an increase can mean higher monthly repayments. Tracker mortgages are directly linked to the Bank of England Base Rate, meaning their interest rate will usually increase in line with the change. Standard Variable Rates (SVRs), which are set by individual lenders, may also increase, although lenders decide when and by how much.
Fixed-rate mortgages work differently. If you currently have a fixed-rate mortgage, your interest rate and monthly repayments won't automatically change because of today's announcement. Your rate is fixed for the agreed period, regardless of changes to the Base Rate during that time.
However, changes in the wider economy and expectations about future interest rates can influence the rates lenders offer on new fixed-rate mortgage products. These rates are affected by several factors, including swap rates, which lenders use to help manage the cost of offering fixed-rate borrowing. This means that fixed mortgage rates can change even before the Bank of England announces a Base Rate decision. Equally, a Base Rate increase doesn't automatically mean every lender will increase its mortgage rates.
For the mortgage industry, changes like this can influence lender affordability assessments, product pricing and the options available to borrowers. Lenders may review their products and criteria as the economic picture develops, so keeping an eye on the market is particularly important.
What does this mean if you already have a mortgage?
The impact of the increase will depend largely on the type of mortgage you currently have.
If you have a fixed-rate mortgage:
If you're currently within a fixed-rate deal, there's no immediate need to worry. Your interest rate and monthly repayments will remain the same until your fixed-rate period ends, unless your mortgage terms provide otherwise.
However, if your deal is due to end soon, it's worth reviewing your options sooner rather than later. The mortgage market can change quite quickly, and exploring available products in advance can help you understand what your next repayments might look like. We always say, it’s always better to secure a rate now, and if rates increase by the time your new product is due to start, then count yourselves lucky! But if they decrease before your new product is due to start, we can always do a rate switch for you.
If you have a tracker mortgage
If you have a tracker mortgage linked to the Bank of England Base Rate, your interest rate will generally increase when the Base Rate rises. This means your monthly repayments are likely to go up.
For example, if your mortgage rate tracks the Base Rate at 1% above it, an increase from 3.75% to 4% would take your mortgage interest rate from 4.75% to 5%. The exact change to your monthly repayments will depend on your outstanding mortgage balance, remaining term and lender's arrangements.
If you're on your lender's Standard Variable Rate (SVR)
If your current mortgage deal has ended and you've moved onto your lender's SVR, you could also see your interest rate increase. However, SVRs are set by individual lenders, so a Base Rate increase doesn't guarantee an identical change. If you're currently on an SVR, it's worth checking whether there are more suitable mortgage options available to you.
What if you're looking to buy a house?
If you're hoping to buy a property in the near future, you might be wondering whether the Base Rate increase means you should put your plans on hold.
The good news is that a Base Rate increase doesn't mean buying a home is suddenly out of reach. Mortgage rates are influenced by a range of economic factors, and lenders continue to offer different products to suit different circumstances.
However, it's important to understand what you can comfortably afford before committing to a purchase. Even relatively small changes in interest rates can affect monthly repayments, so having a realistic idea of your budget is essential. It's also worth remembering that lenders don't all assess affordability in exactly the same way. Your income, deposit, credit history, existing commitments and personal circumstances will all play a part in determining which mortgage products are available to you.
Speaking to a mortgage adviser can help you understand your options and find a mortgage that works for your circumstances, rather than simply choosing the lowest advertised interest rate.
Should you remortgage now?
If your current mortgage deal is coming to an end, you might be wondering whether now is the right time to secure a new rate.
There isn't a one-size-fits-all answer. The best option will depend on when your existing deal ends, the rates available to you and your plans for the future.
Many lenders allow you to secure a new mortgage product several months before your current deal expires. This can give you some certainty about your future repayments while allowing you to review your options if more competitive rates become available before completion.
It's also worth looking beyond the interest rate itself. Arrangement fees, early repayment charges, incentives and the overall cost of the mortgage are all important when comparing deals.
If your current mortgage is due to end within the next six months, it's a good time to start reviewing your options.
Does this mean interest rates will keep going up?
Not necessarily. Although the latest increase may cause concern, it doesn't automatically mean that further increases are guaranteed. The Bank of England reviews the economic situation at regular intervals, looking at factors such as inflation, employment, economic growth and wider financial conditions before making its decisions. Future interest rate movements will depend on how these factors develop over the coming months. While nobody can predict exactly what will happen, keeping informed and understanding your mortgage options can help you feel more prepared.
Could Falling Oil Prices Help Bring Inflation Down?
There has been some positive news in the global energy market this week, with oil prices falling following the US midterm elections. President Donald Trump's Republican Party lost control of Congress, meaning he could face more opposition when trying to make decisions about the country's policies, including its approach to the conflict with Iran. There is hope that this could lead to a more diplomatic approach and reduce the risk of further disruption to oil supplies.
On Wednesday 4 November, the price of Brent crude oil (a common measure of global oil prices) fell by more than 8%, reaching around $94.62 a barrel. But why does this matter to us here in the UK? Oil affects much more than just the price of petrol at the pumps. It's also used to transport food, deliver goods and run businesses. When oil becomes more expensive, these extra costs can eventually be passed on to customers through higher prices. If oil prices continue to fall, it could help businesses keep their costs down and, over time, take some pressure off the cost of living.
This could also be positive news for interest rates. If lower energy and transport costs help bring inflation down, it may give the Bank of England more room to consider reducing the Base Rate in the future. However, this won't happen overnight, and there are still plenty of other factors that influence inflation and mortgage rates. For now, it's an encouraging development worth keeping an eye on.
How can Fairway Mortgage Advice help?
Interest rate announcements can create a lot of uncertainty, particularly if you're thinking about buying a home, remortgaging or simply trying to understand whether your current mortgage is still right for you.
At Fairway Mortgage Advice, we take the time to understand your individual circumstances and help you explore the mortgage options available to you. Whether you're a first-time buyer, looking to remortgage, self-employed or have experienced difficulties with your credit history, we're here to help you understand your options.
You don't need to wait until your current mortgage deal ends or until you're ready to make an application to speak to an adviser. Sometimes, having a conversation early can make all the difference when planning your next move.
Get in touch with Fairway Mortgage Advice today to discuss your mortgage options.