What next for Mortgage Interest Rates

Mortgage interest rates are on the rise. That’s no surprise. The Bank of England increased the Base Rate of Interest to 1.75% in August, and has been raised by 0.5% to 2.25% in September. Further rises are expected later this year and into next year as the Bank attempts to curb rising inflation.

The question that most people are asking is “what is the current rate of interest on mortgages?”

Moneyfacts has reported that the average mortgage interest rates for two-year fixed deals have now passed 4%. That’s a marked increase from a year ago and is likely to continue rising.

The Bank of England’s Monetary policy Committee uses interest rate rises as a tool to cool the economy and bring rising inflation under control. Inflation is currently running at around 10.1% according to the Consumer Prices Index (CPI), which is the measure used to calculate inflation. Inflation is forecast to reach 13% or more by the end of 2022.

Higher energy and fuel costs have contributed to rising inflation thanks to the impact on global prices caused by the Russia/Ukraine war. We will have to wait for the next announcement about inflation, which will be made on 14th September, with the Bank of England announcing its latest decision on the Base Rate the day after. 

What do Rising Interest Rates Mean for Homeowners?

There are around two million homeowners currently on variable rate deals. This is a mix of deals like base rate trackers, normal variable rates, and other arrangements. What continuing mortgage interest rates rises mean for those people in variable rates is an immediate rise in interest and higher monthly payments. Take a variable rate mortgage based on a £200,000 loan. An increase from 3.5% to 4% will mean almost £60 extra in monthly repayments. And that’s simply to cover the cost of rising interest. None of the additional cost goes towards paying down the capital.

And for homeowners looking to remortgage, the picture is the same when they are looking for a good deal.

First Time Buyers 

Mortgage interest rates for first-time buyers mean that first mortgages will be relatively more expensive than just a few months ago, and with house prices higher (8%) than they were twelve months ago, the cost of buying a house has increased. However, there is a chink of light. House prices have begun to fall over the Summer, and are forecast to continue falling for the remainder of 2022.

So the additional cost of a mortgage may be mitigated in part by purchase prices being somewhat lower. This has been caused by the rebalancing of supply and demand, where more properties are becoming available to the market. Halifax has reported a 1.3% month-on-month drop for the first time in over a year.

But this could be short-lived as house prices are forecast to begin rising again during 2023.

A bit about Fixed Rate Mortgages

Fixed rate mortgages are a good way to mitigate the cost of rising mortgage interest rates on your monthly payments. Rightmove has reported that the average interest rate on a 75% loan-to-value mortgage is now 2.9%. That’s more expensive than a year ago, and the rates are rising, but a fixed rate means that a household knows exactly what the monthly mortgage repayment will be for the period of the fixed rate.

What is our Mortgage Interest Rate Prediction?

It’s impossible to say where mortgage interest rates will end up. One thing is clear though. The Bank of England will continue to raise the Base Rate to tackle rising inflation and is forecast to do so into 2023. That means that the base rate of interest will continue to rise along with it, so the cost of mortgage borrowing will continue to rise for as long as the Base Rate continues to do so. 

But remember that mortgage interest rates are still far lower than they have been in the past, and many first-time or younger homeowners won’t have experienced mortgage interest rates in excess of 15%, as they were in the 1980s. 

So we expect mortgage interest rates to continue to rise. If you aren’t currently in a fixed rate arrangement you should consider taking advice on this to manage your repayments and save yourself the additional cost of paying interest and not reducing your actual loan. 

It’s difficult to make a mortgage interest rates prediction right now. Inflation is being influenced by unusual circumstances, and the Bank of England must find the fine line between bringing inflation under control, and not cooling an already cool economy so much that it causes a recession. 

So what can you do about rising mortgage interest rates?

  • We’ve talked about fixed-rate mortgages already, and these are your best option. Whilst the cost is rising, they still mean that your monthly payments are known for a set period. And hopefully, you can take on a deal for a long enough period that when your arrangement ends, the worst will be over. 
  • You could take a look at a mortgage rates interest calculator. Most of the major banks have one on their websites. You can input your information and find out what increasing mortgage interest rates will cost you per month. That can help you to decide whether you need to take action and provide you with some scenarios.
  • Finally, take professional advice from a mortgage broker. They will be able to help you understand your options and will have market data that will help to predict where mortgage interest rates are likely to head. Right now they are expected to continue increasing as inflation rises.

Don’t forget that most mortgage offers last for six months. So if you are looking for a new arrangement and are approaching or are in the last six months you can get your arrangement in place. That will preserve your offer until you need it. As long as it’s no more than six months after the offer is made.

For advice and guidance on your residential mortgages drop a member of our team a line, and we can take a look at your personal circumstances and help you find the best mortgage and protection products to suit your needs. 

Liddle Perrett Ltd is an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of First Complete Ltd which is authorised and regulated by the Financial Conduct Authority.