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Interest rate announcement: August 2023
The Bank of England has raised interest rates for the *14th* time in a row. What does that mean for you?
The Bank of England has just announced that interest rates will go up again, which is the 14th increase in a row. As the headlines roll in, we know that for anyone with a mortgage, or looking to get one, this news can be a little overwhelming. So if you have questions about what this means for you and your mortgage — or your home sale — that's what we're here for. Let's start with the basics.
What happened with interest rates today?
The Bank of England meets 8 times a year to set the base interest rates — and today it announced that it has raised rates for the 14th time in a row. They voted to raise rates by .25%, so the current base rate is 5.25%.
Why did rates go up? Unfortunately, the same reason as last time — and, really, all of the other times. The main goal of raising rates is to keep down inflation. And it is falling — a little. In June, inflation was down to 7.9%, from 8.7% in May. So what's the problem? Well, it's still way too high and it's not falling fast enough. The Bank of England has a target rate of 2% inflation — which is a whole lot less than 7.9%. As we're all feeling the pinch in our grocery bills (and all of our other bills), the aim of hiking interest rates up is to get inflation down faster. Unfortunately, this may not be the last of it. Some people are saying with inflation so high we may have even more rate hikes in our future. And that may be true — but we also know that predictions have been wrong a lot recently. Like, a whole lot. So we think it's safer to wait and see.
Remember, there's a new mortgage charter which puts forward some options your lender should give you if you're having trouble making payments."
What does it mean for the housing market?
That's the question everyone is asking. Earlier this week, Nationwide revealed house prices have fallen at the sharpest rate in the last 14 years. Some experts think that this slide isn't stopping any time soon — and we could see prices drop even more. Others think it will be a "modest correction" or "soft landing", which is just a fancy way of saying the market won't fall too much — it will essentially go back to the price levels we saw before the pandemic. The truth? We don't know yet. Potential interest rate rises in the future, bigger factors in the economy — all of this affects house prices, so we'll have to wait and see. One thing we do know is that higher interest rates are normally passed onto borrowers through higher mortgage rates, which can lower their buying potential and drive prices down. But in the long term? It's too early to tell.
What does it mean for my mortgage?
OK, so this is the other question everyone is asking. And the short answer is: it depends. It will all be down to the type of mortgage you have. If you have a fixed-rate mortgage, where your rate is locked in, then this hike won't mean much to you — unless you're reaching the end of your fixed-rate period. But if you have a variable rate mortgage or if your rate is ending soon, then you'll likely want to start thinking about what to do next. You can use tools like this one to get a sense of how much your mortgage might rise and what payments would look like at different rates. But the most important thing is to talk to your lender or a broker. You can lock into a new rate up to 6 months before your current one expires — and if rates go down before you're due to change, you'll be able to switch to a better one. Essentially, doing research, being proactive, and talking to experts is key. And remember, there's a new mortgage charter that puts forward some options your lender needs to give you if you're having trouble making payments.
Should I overpay? We talked about overpayments after the last interest rate rise — and we're going to talk about them again, because they've been in the news a lot. Overpaying means paying more than your standard monthly mortgage payment to try and bring the balance down faster. Now, lots of us are not in a position to overpay. That's OK. If you are able to, you might want to think about it because it will mean less interest in the long run — or at the very least look at banking some savings so you can overpay when your mortgage term is ending. Not sure what's best in your circumstances? Money Saving Expert does an excellent job of talking you through it and giving you a calculator to play with, so you can look at your current situation and what might be best. But the most important thing is if you're concerned, talk to your lender. Or if you're rate is coming to an end or you're looking at your options, you can always get in touch. What’s next? Great question. We don't know what's coming next — but we do know we can be here to talk you through it. The Bank of England sets rates 8 times a year and the next time is September 21st, so we'll be back with the latest then. But in the meantime, we're always here if you need us.
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