The Bank of England increased the base rate again on 3rd February – to 0.5% – despite increasing it in December 2021 from 0.1% to 0.25%. As the first back-to-back increases since 2004, both decisions were made to counteract the rising inflation rate. Inflation has now hit 5.4%, which is the highest it’s been for 30 years but, unfortunately, it looks set to keeping going up.
Inflation affects your cost of living in that the higher the rate, the less of a product you can buy for the same amount of money. If your income doesn’t increase at the same rate as inflation, you’re left severely out of pocket. It has been forecast that inflation is to reach a high of 7.25% in April so we can expect interest rates to keep rising too as a way to combat this. The question, though, is how high are interest rates expected to go?
What has caused the inflation rate to rise so rapidly?
The rate of inflation first began to rise as the economy recovered from the COVID-19 crisis in 2021. As businesses reopened, people started buying more products. However, problems encountered with a lack of supplies for imported goods, transportation issues and backlogs at ports caused the prices to increase. As well as these factors, energy prices have soared.
How increased interest rates can combat this
The Bank of England has a 2% target, set by the government, for the rate of inflation. This is believed to be the optimum rate needed to maintain a healthy economy. As mentioned above, the rate is currently much higher than this at 5.4%. The most effective method the Bank of England can use to combat this is to increase interest rates.
Higher interest rates make it more beneficial to save and more expensive to borrow — you may already have noticed an increase in your mortgage repayments for your home in Bexley if you have a variable rate. Therefore, increasing the interest rate encourages people to save more and spend less, which reduces demand for products. This, in turn, causes price increases to slow down and gradually forces the inflation rate to decrease.
Future increases to interest rates
The Monetary Policy Committee (MPC) reviews the base rate eight times each year with the next meeting to take place on 17th March. Experts predict there will be further increases throughout the year with a possible increase of 0.25% each time. During February’s meeting, four of the nine members voted to increase the rate to 0.75% rather than to 0.5% so be prepared for a third consecutive increase after the review in March. By the end of this year, it’s believed the base rate may reach 1.25% and there’s a possibility that it will hit 1.5% in 2023. As a result, inflation should decrease towards the end of the year and continue to do so during 2023.
How interest rate increases can affect you
Higher interest rates make it more expensive for you to borrow, such as with credit cards, a bank loan, a car loan or your mortgage. If you have a tracker mortgage for your Bexleyheath property, for example, the rate you pay is linked to the Bank of England’s base rate. Each time this rate increases, so does the amount of interest you pay for your mortgage. You may not have noticed much of a difference when the rate increased in December but this further increase may have come as a bit of a shock.
First-time buyers are particularly affected by these increased interest rates. House prices have shown a strong growth rate since the start of 2022 and as interest rates go up, affordability checks become harder to pass as first-time buyers are faced with higher repayments and effectively have to pay more in the long run to borrow what they need. As it is, the previous low interest rates have made saving a deposit extremely hard and higher deposits are usually expected by lenders in the current climate. As well as that, if you’re living in rented accommodation while hoping to save for your first home, you may now find that your landlord passes on the higher costs they have to incur by increasing your rent.
The growth in house prices may slow down slightly as interest rates continue to climb but there’s still a higher demand for property than there is availability so prices are unlikely to fall drastically.
Act swiftly with your mortgage
With these back-to-back increases to the base rate and further increases on the horizon, it’s recommended to take action quickly. Speak with your mortgage broker in Kent, London or Edinburgh to shop around for a competitive remortgage deal.
If you currently have a fixed rate but it’s nearing the end of the term, secure a new deal with a fixed rate as soon as you can before lenders’ interest rates go up across the board. If your mortgage has a variable rate, consider switching to a fixed-rate deal so that you can rest easy knowing you’ve locked in as low a rate as possible before there are further interest rate increases.
Bear in mind that many mortgage products are only available via brokers. Rather than approaching lenders yourself, you’ll have a much better chance of securing a good Welling or Pimlico mortgage deal when your broker searches for one on your behalf. Your broker can also check the remortgaging terms, such as early repayment charges, and ascertain how much you can save by switching to a new deal.