Published 5th January 2022
In the run up to Christmas, the Bank of England announced a rise in interest rates from 0.1% to 0.25%. This was the first increase in over three years the timing of which was met with some surprise. The rise in Omicron cases, rising fuel and energy costs, inflation at its highest level in 10 years were all factors already affecting consumer confidence and putting additional pressure on households across the UK.
So why was this decision taken? Read our short blog on the background to inflation, how it can affect interest rates and what it could mean for you.
Inflation is the increase in the cost of our goods and services. It is calculated monthly by the Office of National Statistics. The price of 700 regularly purchased items, known as the ‘basket of goods’, is costed to give the Consumer Prices Index (CPI) which are then compared to the cost of these items at the same time last year. The change in price gives the rate of inflation. If inflation is high, then goods cost more and consumers can begin to feel the pinch. If inflation is low, then goods cost less and people feel more confident to spend more.
A way to control inflation is through the increase or decrease of interest rates as decided by the Bank of England. When inflation is seeing an upward trend, interest rates are increased. The cost of goods goes up, borrowing increases meaning monthly outgoings such as mortgage payments increase. However, saving rates are better which encourages people to spend less and save more. As people spend less, demand lowers and the price of goods goes down. This then controls and brings down inflation.
Although relatively small, the increase in interest rate will have an immediate effect on mortgage payments but this will depend on the type of mortgage product you have. Those on tracker mortgages i.e. those tracking the Bank of England base rate will see an immediate increase. Those on variable rates will see the increase start to filter through as lenders adjust their borrowing rates accordingly.
For those on fixed rate mortgages, there will be no immediate change. With around 74% of all mortgages being on a fixed rate, many will be safe from any increases until the fixed term ends. Whether or not there will be a change when the fixed rate period ends will remain to be seen.
The increase in interest rates can make for an unsettled market. It could deter potential homebuyers and slow down the strong growth in property values that we have witnessed over the last year. There could also be a change to mortgage products with the low fixed rate mortgages that have been so readily available coming to an end. However, with mortgage lending criteria set to be eased and demand for property still outstripping supply the market looks set to remain buoyant.
Oliver Meddick, CEO of Home Legal Direct comments. “With Rightmove reporting their highest number of new sellers ever recorded on Boxing Day, great buying opportunities are out there. Competition between lenders remains strong and affordable borrowing rates are still available. The key is to do your research and prepare; look for the best mortgage deals, know how much you can borrow, get to know your area and calculate the costs associated with buying a home.”