When will interest rates go up?
The Bank of England base rate has been at all time low of 0.5% since early 2009. This has been good news for many borrowers, who have been able to get excellent rates on their mortgage.
It’s impossible to predict with any certainty when interest rates will rise again – it could be a few months or as long as a few years. The current consensus among economists is that rates will rise again towards the end of 2013 or even in 2014. But economist predictions have been wrong before.
The most important thing for borrowers is to be sure that if you’re on a tracker, discount or other variable rate mortgage – you could still afford your repayments if rates went up by 2%. Although it’s unlikely that rates would rise by 2% in a short period, it’s not impossible.
On Black Wednesday back in 1992, the Chancellor raised interest rates by 2% in one day, and a further 3% shortly thereafter. Although this was an extreme event, it goes to show that movements in interest rates can be unpredictable.
How are interest rates set?
Since 1997, the setting of the Bank of England rate (sometimes known as the base rate) has been the responsibility of the Bank’s Monetary Policy Committee (MPC), which consists of eight economists and the Bank of England governor. They meet at the start of every month, and their decision as to whether to raise, cut or freeze rates is announced at noon, usually on the first Thursday of the month.
The MPC’s main aim is to keep inflation, as measured by the Consumer Prices Index (CPI), at or within 1% of its target of 2%. Its secondary aim is to support the government’s economic objectives of maintaining growth and reducing unemployment.
Broadly speaking, if inflation is above its target, the Bank will be looking at raising interest rates. And if inflation is below its target, it will be thinking about cutting interest rates. However, a number of other factors, such as levels of growth in the economy, and unemployment, will also be taken into account. If the economy is weak, the Bank may still choose to cut interest rates even if inflation is currently above target. Conversely, the Bank may choose to increase the rates if it believes the economy is overheating.
How are mortgage rates affected by changes in the Bank rate?
If you have a tracker mortgage, your interest rate will probably be directly pegged to changes in the Bank rate. But other mortgage rates are only loosely affected by changes in the Bank rate. This is one of the key factors you should consider when deciding whether to choose a fixed or variable rate mortgage.
The Bank of England rate is merely the overnight interest rate that banks would pay to borrow from the Bank of England. However, the rate at which banks lend to their customers will depend on a number of factors, such as the interest rates that banks charge each other, and the rates that they are paying on their customers’ savings accounts.
Hence, if the Bank of England rate starts to rise, it doesn’t necessarily mean that new mortgage rates will be higher. However, anyone who has an existing tracker mortgage which is linked to the Bank of England rate would see their monthly repayments rise immediately.
You can use our mortgage repayments calculator to see how your repayments might be affected by interest rate increases.
Speak to an impartial mortgage adviser
To discuss your mortgage options, speak to a Which? mortgage adviser by calling us on 0117 981 7787 – or request a call back. Our advisers look at every mortgage from every available lender, and because they’re paid a salary – not a sales commission – you can have confidence that you’ll receive truly independent advice.