With the recent upheaval in the money markets and the subsequent increase in interest rates, many people are asking why have rates increased so quickly, what is likely to happen to interest rates now, and what are their options when looking for a mortgage.
For the background to the recent very low-interest rates, if we look back to the period between the years 2000 to early 2008, the Bank of England base rate varied between 3.51% and 5.75%. Then in 2008, the global economy suffered a massive financial shock with the ‘credit crunch’. It was a financial crisis unprecedented in history, where the major High Street banks ran the risk of failing, and the global property markets suffered a massive down valuation with mortgages becoming much harder to obtain.
The two main weapons that central banks (like the Bank of England, the European Central Bank, and the American Federal Bank) employed to try to kick start the world economies were the printing of money (quantitative easing) and the reduction of interest rates to levels never seen before. Our own
Bank of England base rate, for instance, between late 2008 and late 2021 varied between 0.25% and 0.75%.
Between October 2021 and October 2022, the Bank of England base rate had climbed to 2%, as the bank reacted to the steeply rising inflation and consequent rise in the cost of living, caused, many experts believe, by the long period of very low-interest rates.
The mini budget of Liz Truss and Kwasi Kwarteng released on 23rd September 2022 caused a violent reaction from the money markets, a loss of faith in sterling, and an immediate rise in the cost of borrowing.
A typical 90% loan-to-value 5-year fixed rate mortgage increased from the mid to high 3% range to the mid to high 5% range in a few days and then climbed to over 6% in some cases. At this point (3rd November 2022) those fixed rates have fallen very slightly, and the Bank of England have today increased the base rate by 0.75% to 3%.
There is disagreement among economists on the expectations for the Bank of England base rate in the next year. In August 2022 the Guardian newspaper predicted a rise above 3% this year with a peak of 4.1% in mid-2023, while the i newspaper in September 2022 predicted rises to 5% in mid-
at any time if your circumstances allow, however when the Bank of England base rate increases, Standard Variable Rates usually increase very soon after.
Discounted rates – where a lender offers a discount from their standard variable rate, for instance, a 2% discount from their SVR for 2 years. Discounted deals often appear competitive when offered, however, you are usually tied to the lender for the term of the deal, and if we have a period of the base rate rising, which as mentioned above means that SVRs normally increase there is theoretically no limit on how high the rate can increase to.
Tracker rates – these ‘track’ the Bank of England base rate, so you may have a 2-year tracker which is set at 1% above the Bank of England base rate. So, when the base rate is 2% you will pay 3%, while if it increases to 4% you will pay 5%. Sometimes cheaper initially than fixed rates, however, if the base
rate increases long-term there is again, no theoretical limit to how much it could increase. Most tracker deals will tie you in for the term of the deal.
Fixed rates – these are fixed for the period of the fixed rate, which usually vary from 2 years to the lifetime of the mortgage. You will almost certainly tie to the lender for the term of the fixed rate, and if overall interest rates fall you could pay more than other people, however, the amount that you pay each month cannot change in the term of the fixed rate which is very helpful when budgeting.