The Bank of England has talked up the prospect of future interest rate rises in recent weeks, but it’s unlikely you’ll have to worry about the cost of mortgage rates rising this year.
The Bank interest rate is currently at 0.75%, where it has been since August 2018. Historically this is a very low rate, which is a key reason why mortgage rates have been very competitive for some time.
Indeed, to put the 0.75% interest rate into context, the Bank rate was around 15% during the summer of 1990.
Explaining the Bank of England interest rate
The interest rate, also known as the base rate or Bank rate, is used to control the cost of funds for mortgage lenders. Without going into too much detail, if the base rate is higher mortgage rates are likely to be higher too.
This is directly the case with the tracker and standard variable rate mortgages, which generally track the base rate, while a higher base rate is also likely to cause the cost of new fixed rate mortgages to rise.
The latter type of mortgage has a fixed interest rate during a set period, regardless of what happens with the base rate during the fixed period.
Talking up the interest rate
Members of the Monetary Policy Committee, the committee at the Bank of England responsible for determining the interest rate, talked up the prospect of a rate rise in early June.
One member, Michael Saunders, said the rate is likely to return to normality earlier than the markets expect, while it could rise even if Brexit uncertainties aren’t resolved.
Another, Ben Broadbent, said the interest rate is likely to rise faster than previously expected in May.
And a third committee member Andy Haldane, writing in The Sun, said the time is nearing when a small rise would be prudent while acting earlier would prevent the need for a steeper rise in future.
Despite these warnings, most economists still expect the interest rate to remain at 0.75% until 2020, while some even think the base rate could be cut back to 0.50% depending on what happens with Brexit.
Given that Brexit negotiations have been extended until October 31st, there’s still uncertainty regarding what relationship the UK will have with the European Union after that date.
If the UK leaves the EU without a deal, which could be more likely depending on who becomes the new Prime Minister, economists think the markets could be spooked, which could result in the Bank of England lowering the interest rate to encourage lending and spending.
Other factors affecting the decision include global issues impacting the financial markets, like President Donald Trump’s tariffs on Chinese goods and car imports.
Research consultancy Capital Economics has predicted the first base rate rise to happen in the second half of next year, while ING economist James Smith forecasted an increase in early 2020.
The road ahead for mortgage holders
Clearly, the road ahead is unclear regarding where the Bank of England base rate will end up, but it seems unlikely that the rate will rise this year if you take the experts at face value.
Even if there are increases in the Bank interest rate, they are likely to be gradual and small. Indeed, it’s unlikely the cost of your mortgage rate will soar whether you’re on a tracker rate, coming to the end of your term and looking to remortgage or looking for a mortgage for the first time.
Of course, if you want to be unaffected by Bank rate rises in the near future you should take out a mortgage fixed for 5 or 10 years, which will likely be more expensive than a variable rate, at least initially, but you’ll have certainty over how much your mortgage will cost over that period.
Regardless of what you decide, even if the base rate and correspondingly mortgage rates rise in the years ahead, it’s important to remember that the cost of borrowing has become so cheap that it’s almost a case of ‘the only way is up’.
Therefore, if you’re able to take out a mortgage on a property today you should appreciate the current climate, as well as the likelihood that you may not have it so good in future.
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