What would that mean for your mortgage? – Forbes advisor UK


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With inflation at 4.2% in October – near its 10-year high of 4.8% in November 2011 – expectations are growing that the Bank of England will raise the key rate from its current all-time low of 0.1% next time they make an announcement on the subject on December 16th.

The Bank of England announced on November 4th that it would keep the interest rate at 0.1%. That came as a surprise to many commentators, who expected an increase to cool the economy and lower inflation, which stood at 3.1% in September.

But what exactly is the bank rate and how could an increase affect you? Below you will find simple answers to the most frequently asked questions …

What are the interest rates now?

The Bank of England’s key interest rate is currently pegged at 0.1%. It was reduced from 0.75% on March 24, 2020, i.e. right at the beginning of the pandemic. Before that, it had largely stuck at the 0.5% mark for several years.

Who decides what happens to the interest?

The Bank of England’s Monetary Policy Committee (MPC) meets eight times a year (roughly every six weeks) with its nine members to discuss whether to keep the key rate or move it up or down – and by how much. The MPC takes into account factors such as inflation, economic growth and the UK employment rate. Each member then has one vote, with the majority determining the result.

At the last interest rate meeting on November 2nd, the vote was 7-2 to keep the interest rate at 0.1%. The last interest rate announcement for 2021 will be on December 16.

Why could interest rates rise in December?

Interest rate hikes are used by the Bank of England as a tool to contain rising inflation as people and businesses are less willing to borrow for spending when the cost of borrowing increases, dampening demand and depressing prices.

The rate of inflation for October was 4.2% – a sharp increase from the 3.1% reported in September and more than double the bank’s government-set target of 2%. Many commentators are confident that there will be a rate hike in December with further possible hikes in 2022.

Announcing its decision on Nov. 4, the bank said economic indicators are suggesting the key rate could reach 1% by the end of 2022.

Bank of England Governor Andrew Bailey said recently on an online panel organized by the Group of Thirty, an economic advisory group, that while the rise in inflation would be temporary, it would be “higher and longer “Could be due to the current rise in energy prices (more on this below).

The labor market is also showing that it is strong enough to withstand a rise in interest rates. According to the Office for National Statistics (ONS), the UK’s employment rate was an estimated 75.2% in September, which is still below pre-pandemic levels but 0.5 percentage points higher than last quarter (February until April 2021).

Why is inflation rising?

Inflation – the cost of general goods and services – is being driven high by global supply shortages following a return to trading after the Covid lockdowns.

The shortage of microchips, which has led to supply problems with items ranging from game consoles to on-board technology for new cars, is a prime example of this. A shortage of new cars, in turn, had an impact on the used car market, which, according to AutoTrader, was 21% more expensive in September than in the previous month.

The shortage of staff in some industries is also leading to increased follow-up costs – the most recent and most notable example are truck drivers, who have recently led to fuel shortages at filling stations across Germany. According to the ONS, fuel costs in September 2021 (at 134.9 Pa liters) were the highest since September 2013.

Meanwhile, soaring wholesale gas prices just in time for the colder weather spiked household energy bills, and the regulator’s price cap rose 12% in October. Cheaper fixed tariffs for energy have completely disappeared from the inventory, which means that you cannot make savings when shopping for a better offer.

What does a rate hike mean for mortgages?

One of the biggest concerns about a rise in interest rates is the potential impact on mortgage costs.

Homeowners on tracker mortgage contracts should see an instant change in their monthly payments as their interest rate is directly tied to the interest rates.

In due course, a rate hike will almost certainly affect homeowners paying a standard floating rate (SVR) or discounted deal on an SVR, as lenders will also adjust that independent loan rate.

Borrowers who go through a fixed rate transaction halfway are not affected by an interest rate hike until the end of the offer if they use their lender’s respective SVR.

However, according to David Hollingworth of mortgage broker London and Country, the market expectation of a rate hike will drive lenders’ financing costs for new fixed rate mortgages.

He said, “We have already seen some signs of fixed rates rising and while competition should help keep some attractive business going, it looks like the rate reduction borrowers have seen in recent months have, comes to an end or even begins. “reverse.”

Fixed rate mortgage lending costs have been so low in recent months that borrowers would have overpaid up to £ 2,500 a year if they failed to dart at the end of their term, according to research by London and Country (October).

You can see what mortgage rates are available in our live table below by selecting your circumstances and criteria.

What about saving?

However, the prospect of an interest rate hike could already have a positive effect on the savings market.

According to Moneyfacts’ UK Savings Trends Treasury Report, the number of available savings accounts has risen to its highest level since it was first locked in 2020, while the average interest rate on longer-term fixed income bonds rose to 0.76% (over 550 days) for the first time exceeded 1% since June 2020.

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