Earlier this month, Mark Carney — the head of The Bank of England — announced a history-making base rate increase. The Monetary Policy Committee (MPC) voted 7-2 to take the interest rate from 0.25% to 0.5%. The last time this happened was over a decade ago. So what does this mean, and how might it affect you? Our Huddersfield-based mortgage broker has a closer look…
The rate rise actually takes us back to the position we were in just over a year ago in August 2016, when it was slashed due to Brexit. Finding ourselves in a unique, unpredictable situation, Mr Carney and the MPC took the decision to cut the rate to stimulate the economy and counteract any fears of another recession.
The reasoning was this: a decrease in interest rates encourages people to save less and spend more, injecting further money into the economy. Businesses tend to invest more and employment increases. It also means that interest payments are reduced on variable rates, which is great for the 3.7 million home owners on this type of mortgage.
So why have they increased the rate?
In one word — inflation. The Bank of England has a 2% inflation target. In September 2017, the rate stood at the highest it had been since April 2012 at 2.8%. This has been the result of two main factors. Firstly, an increase in wages — due to better business conditions — and, secondly, an escalation in the cost of raw materials. Higher oil prices and more expensive imports have been caused by Brexit and a 12% decline in the value of the pound.
This makes our goods and services more expensive and reduces consumers’ purchasing power, essentially meaning that we all get less for our cash. The base rate increase will counteract this and help savers.
What does this hike mean for you?
With only 30% of UK households now having a mortgage, it makes the rise less risky and affects fewer home owners than people might think.
Of course, anyone whose finances are already at breaking point may suffer because of this increase. However, the rates are still extremely low, especially compared to 1980 when they stood at 17% — the highest on record.
The 3.7 million people who are on a variable rate will be affected the most, and yet they will only pay around £200 more per year, per every £100,000 they owe. Plus it will take some time before it impacts anyone with a fixed-rate mortgage.
So, the scale of this rise isn’t likely to affect affordability and and is actually a positive for those who are saving — particularly first time buyers, or people who’ve retired and want to live off the interest.
However, The Bank of England expects the UK economy to grow by 1.7% for the next few years, which would require a couple more interest rate increases up to 2020.
So, if banks follow suit and pass on these hikes, then our advice to home owners is to check your mortgage rate today to ensure you’re not paying over the odds. And do it sooner rather than later, before lenders review or announce any changes.
And it seems that Martin Lewis, founder of MoneySavingExpert.com agrees. In his blog, he said: “There’s still a window of opportunity for the next couple of weeks to get current cheap deals. Everyone should check to see if they’re overpaying.”
Your home may be repossessed if you do not keep up repayments on your mortgage.
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