The Bank of England’s Monetary Policy Committee (MPC) has decided to keep the base rate steady at 5.25%. For those keeping tabs, this marks the second time they’ve paused on altering this crucial rate after a series of 14 increases that began in December 2021.
For those with mortgages or considering stepping into the housing market, this announcement is generally good news. A consistent rate implies stable mortgage interest rates, at least in the short term. On the flip side, savers might feel a tinge of disappointment as their savings won’t enjoy higher interest rates that a rate hike would have possibly ushered in.
To get a sense of the committee’s decision, the MPC was divided with 6 members in favour of holding the rate and 3 against. This is a clearer majority than last September’s close 5-4 vote.
The Backdrop: Inflation and Previous Rate Hikes
The decision to maintain the rate can be attributed to various factors. Chief among them is the UK’s inflation situation. The official measure, the Consumer Prices Index (CPI), registered 6.7% inflation in September. This is significantly above the Bank of England’s target of 2%.
Between December 2021 and August 2023, the bank responded to high inflation by increasing the base rate. The rationale? By making borrowing more expensive, there would be reduced demand, meaning less new money entering the economy. A side effect of this was the hope that costlier mortgages and better savings rates would nudge individuals towards saving more and spending less.
Today, as the inflation rate gradually lowers from its previous highs, the Bank of England is adopting a “wait and see” stance, observing how their past rate increases impact the economy.
Expert Opinions
Paul Dales, a leading economist at Capital Economics, anticipates that the 5.25% rate will remain unchanged until the latter part of next year. Echoing this sentiment, Victor Trokoudes, the CEO of saving and investing app Plum, foresees the rate remaining constant for a considerable duration, barring any major economic downturns.
How Will This Impact Mortgage Borrowers?
Current property owners, especially those looking to remortgage, should pay attention. The existing higher base rate means some homeowners could find themselves in challenging situations.
The silver lining for many borrowers is that their interest rates are locked in for a set duration. However, nearly 1.6 million borrowers might shift from their fixed-rate mortgages next year. This can translate into significantly higher monthly payments. For instance, on a £200,000 mortgage over 25 years, monthly payments could surge from £876 to £1,327.
It’s worth noting, however, that there are still competitively priced deals on the market, especially for those with significant home equity or substantial deposits. Consulting with a mortgage broker can provide clarity on the best available rates.
For those on tracker and variable rates, this announcement provides some respite. Rates associated with these types of loans can fluctuate, and a steady base rate means no immediate increases.
The Future for Fixed Rate Mortgages
Mortgage holders with fixed-term deals should pay attention to market predictions rather than just today’s base rate. Lenders often adjust their fixed mortgage rates based on where they anticipate the base rate heading in the future.
Lately, several major lenders, including HSBC, Nationwide, and Santander, have reduced their rates, influenced by evolving market expectations. These changes are closely tied to swap rates, which are agreements that shield mortgage lenders from interest rate volatility. Currently, both two-year and five-year swaps are trending below the 5.25% rate, signaling industry optimism.