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Will Interest Rates Rise?

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Interest rates rose again this month with the Bank of England increasing the base rate by 25 percentage points to 1%. But will interest rates rise further?

The base rate is now at its highest for 13 years and there are a whole generation of homeowners who won’t have seen rates this high. Older homeowners, however, have experienced much higher rates; it was over 5% back in 2007.

What are your mortgage options?

To get the best idea of your mortgage options and what mortgage is right for you it’s always worth speaking to a mortgage adviser. They will understand your circumstances and look across the mortgage options most suitable to you.

Our preferred mortgage adviser offers fee-free advice in 24 hours and a decision on your mortgage in 5 days from submission of your mortgage application. Or they will pay you £100!

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Your home may be repossessed if you do not keep up repayments on your mortgage. Terms and conditions apply to their mortgage decision promise.

What does a rate rise mean for my mortgage?

The rise in the base rate will affect you if you have a variable rate mortgage; for example, one linked to your lender’s standard variable rate (SVR) or a tracker mortgage. Variable mortgages see interest rates move in line with the base rate.

Our recommended mortgage broker Trussle estimates that the latest rise will typically add £340.56 to annual payments. Following previous interest rate rises, this will mean that homeowners could see their mortgage bills increase by more than £1,300 a year compared with November 2021.

It’s not unlikely that people could face real financial challenges due to this, especially if rates continue to go up, and the Bank of England rate reaches 1.5%. This might not affect everyone as those on fixed-rate mortgages are protected for now, but 1.5 million face the end of their term this year, and it’s expected that some will struggle with the extra cost.

How interest rates vary

The base rate was reduced to 0.1% in March 2020 at the onset of the pandemic. It went up to 0.25% in December 2021, before February, March and May 2022 all saw rises of 0.25% to bring the base rate to 1%.

If you are on a fixed mortgage rate, you won’t see your payments change. But when your fixed-rate ends and you look for a new deal, you’re likely to find that rates have gone up. If you need a new mortgage, you should compare mortgage options and discuss them with an experienced adviser.

If you’re struggling to get your head around mortgage interest rates, you’re not alone. From LTV to SVR, there are plenty of terms to make sense of. But – interest rates are easier to understand than you might think. Our mortgage interest rates guide outlines how it all works and what you need to know.

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Remember: your home may be repossessed if you do not keep up repayments on your mortgage. Terms and conditions apply to their mortgage decision promise

If you have savings then there is some good news regarding the interest rates rises, as you’re likely to see the interest rate paid on your money will go up.

Why have interest rates risen?

The Bank of England said in a statement: “We’ve put interest rates up to help bring inflation back down. It will take time to work.”

Inflation is the rise over time in the prices of goods and services. It’s the Bank of England’s job to keep the UK’s rate of inflation low. The UK inflation rate is measured by the Office for National Statistics. It increased to 7% in the year to March 2022, up from 6.2% the month before.

Higher interest rates make it more expensive for people to borrow money and encourage them to save. That means that overall, they will tend to spend less and the prices of goods and services will rise more slowly. That, in turn, lowers the rate of inflation.

The Bank of England has a target rate for inflation of 2%. It’s higher than that at the moment due to higher prices of goods coming from abroad and large increases in the cost of energy.

The bank says it’s likely that inflation will keep rising this year and start to come down next year. It expects it to be close to its 2% target in about two years’ time.

How far will interest rates rise?

Interest rates are likely to rise further in 2022. Economists predict that inflation could hit 8% soon, and the Bank of England’s chief economist has warned that more interest rates rises are likely to be needed to keep inflation under control.

There are nine members of the Bank of England’s Monetary Policy Committee (MPC). Six voted for the rate to be increased in May. The other three members didn’t vote for it to be held at 0.75%. They wanted it to go up by a bigger jump of 50 percentage points to 1.25%.

Most experts are predicting the base rate could rise to between 1.5% and 2% by the end of 2022. But worse could be to come, as the MPC report published at the same time as the interest rate decision suggests that the committee sees the bank rate rising to 2.5% by the middle of next year.

Always discuss your mortgage options with a mortgage adviser to find out what options are available to you.

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Always remember that your home may be repossessed if you do not keep up repayments on your mortgage. Terms and conditions apply to the mortgage decision promise.

Last Updated: May 17th, 2022

Phil Spencer

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