Homeowners have been battling volatile mortgage rates since the start of last year, and much of this turbulence can be attributed to 14 consecutive changes to the Bank of England’s Base Rate.
The Bank of England describes the Base Rate as “the single most important interest rate in the UK”, and it is currently resting at a 15-year high of 5.25 percent.
This enhance from the 0.1 percent lows seen in December 2021 reflects the central bank’s efforts to reduce the country’s spiralling inflation rate to the Government-set target of two percent. But why has this had an impact on mortgage rates and what deals are typically affected?
Why does the Bank of England Base Rate impact mortgages?
The Bank of England’s Base Rate is the rate that it charges other banks and lenders when they borrow money.
Liz Hunter, director at Money Expert, explained: “This influences the interest rates that lenders charge various types of credit they offer people – including mortgages.
“The Bank of England can change the Base Rate to influence the UK economy. Lower rates inspire people to spend more, but this can direct to high inflation and increased living costs as the price of goods becomes more expensive.
“Higher rates have the opposite effect and will be imposed to keep the UK economy stable. This is why we have seen 14 executive interest rate rises in the last 12 months as inflation rose significantly and the Bank of England needed to try and lower it.”
Rising interest rates can have a significant impact on a wide range of areas including borrowing, stocks and shares, savings, consumer and business spending, as well as inflation.
However, a rising or falling Base Rate impacts different loans in different ways – it all depends on the type of deal a person has.
How does the Bank of England Base Rate impact mortgage rates?
Any type of borrowing which includes a fixed rate of interest, such as a fixed-rate mortgage, won’t be affected. This is because the fixed rate is always agreed upon before the loan is taken out and doesn’t change until it’s up for renewal.
However, people who have tracker mortgages or Standard Variable Rate (SVR) mortgages may be impacted differently.
Ms Hunter explained: “Anyone with a tracker mortgage, which directly tracks the Bank of England Base Rate, will see an immediate enhance in their repayments if it were to rise and a decrease if it was to fall.”
Meanwhile, Ms Hunter noted that those on a Standard Variable Rate “may see a change”, but this ultimately depends on their lender, which sets its own rates and these don’t always change with the Base Rate.
Ms Hunter said: “For anyone on a fixed rate mortgage, any changes – whether it’s a rise or fall – wouldn’t apply until the end of your fixed period.”
Mortgage rates are dropping
Average mortgage rates have been dropping week-on-week since the end of summer, and this trend is only predicted to continue.
With analysts widely expecting the Bank of England to hold the Base Rate at 5.25 percent for the third time in a row, growing market stability has sent swap rates on a downward spiral.
Swap rates ponder the price lenders have to pay financial institutions when securing fixed rate funds, and average rates have been falling for five months in a row, according to Octane Capital.
While both one-year and five-year swap rates remain higher than the start of the year, Octane Capital said the data provides advance evidence that mortgage rates “could be set to drop” advance.
Kellie Steed, a mortgage expert at Uswitch, said: “This week we’ve seen a continued refuse in rates across two and five-year deals. There has also been an enhance in the number of deals available overall, with over 700 deals now available at 90 percent Loan To Value (LTV).
“SVRs remain high, with the average rate still above eight percent. So those mortgage holders with two or five-year deals ending imminently may want to lock in a new rate sooner rather than later – despite suggestions that rates will now continue to fall, albeit gradually.
“The Base Rate announcement on December 14 should supply more insight into the direction of travel of mortgage rates going into January 2024.”
The Bank of England will announce the Base Rate decision at midday today.
