How Bank of England interest rates affect your mortgage
You’ve probably seen the news each month about the Bank of England doing something with interest rates, with talking-head experts frothing with excitement with their predictions as to what is likely to happen and then picking away at the offerings once the announcement is made.
With so much going on in the world and in your life, unless you have an interest in monetary matters, you might find that such dry news washes over you or passes you by. So, why is what is happening to the interest rates so important to you as a current or future homeowner?
How the Bank of England manages inflation
The Bank of England has an ongoing directive to manage inflation, which has an impact on how much disposable income you have each after paying all the necessary household bills. The higher the inflation rate, the more likely it is that you’ll have less money to play with.
However, while rising prices are always unpalatable, some inflation in an economy is healthy since it indicates it is growing, which will then eventually come back round to helping the individuals. But if inflation is too high, most people will stop spending and the economy starts to shrink and, if that happens with shrinking GDP (Gross Domestic Product – the measure of the health of the economy) for two successive financial quarters, the country is officially in recession, which means that investors become even more cautious.
The Bank of England’s inflation target – set by the Government – is 2%, which means that the Monetary Policy Committee’s (MPC) task each month is to decide what to do with the base interest rate to manage the latest inflation figure.
Current interest rate changes and what they mean
Currently, the inflation rate is running at 3.8%, which means the MPC have reduced the base interest rate by a quarter of 1% to 4%, the fifth reduction since August 2024.
This base rate is the interest rate that the Bank of England pays to commercial banks for the funds they hold with the Bank of England. As such, this rate then influences the interest rates that these commercial banks charge to borrowers and offer to savers.
An important point is that the commercial banks don’t have to pass on the changes to the base rate in their interest rates for loans and savings, but usually, when the base rate changes, there is some corresponding movement in the individual bank’s rates.
Impact on your mortgage payments
So, the latest news of a reduction in the Bank of England base rate should see the monthly mortgage payments go down. But this really depends on what mortgage product you currently have.
If you are tied into a fixed-rate mortgage for a period of time (usually two or five years), which the majority of home loan customers are, you will still have to pay whatever the interest rate was agreed; however, if you are coming to the end of your fixed-rate term and are looking to refix your mortgage, it is quite likely that now you’ll find the terms for the fixed rate are lower than they were.
This BBC News article notes that the average 2-year fixed-rate mortgage has fallen below the 5% for the first time in almost three years following the impact of the mini-budget of the Truss Government in September 2022. This is also encouraging news for those wanting to get a mortgage but are concerned about the cost and the accrued interest to be paid each month.
Getting the right mortgage advice
It’s always helpful to talk to an expert about what is best for your needs and situation when it comes to taking out a mortgage, particularly with the volatility of the economy and the interest rates. After all, buying a home is probably the biggest expenditure you’ll ever have to plan for in your life, so it’s worth taking some time to review the options and see what the best mortgage deal is for your circumstances.
Professional conveyancing support
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