Interest rates rose by 0.5% to 5% this week, as the Bank of England continues to grapple with high levels of inflation, marking their 13th consecutive rise.
Now, homeowners are wondering how this will impact their mortgage.
The impact on mortgage rates
In the last two weeks, fixed-rate mortgage rates have been rising ahead of the expected Base Rate increase announcement.
This is because lenders set their fixed-rate mortgages based on the Base Rate set out by the Bank of England.
Fixed-rate mortgage rates are drawn up years in advance, based on the market’s Base Rate predictions which can span across two, five, and even ten years – also known as “swap rates”.
The Bank’s Base Rate impacts the amount of interest a property owner will pay on loans. If the Base Rate changes so does the interest amount, which can impact mortgages.
Your monthly payments won’t change until the end of your deal if you’re on a fixed-rate deal. However, for those with a tracker or variable mortgage, monthly payments will increase.
Affordability
Levels are slowly returning to pre-pandemic rates, with more people enquiring about properties than this time in 2019.
However, according to Zoopla, higher interest rates are causing homeowners to reassess their budgets and what they can afford in the current economic climate.
The Base Rate is predicted to peak at around 5.75% before it begins to drop again. Base Rates are analysed by the Bank of England’s Monetary Policy Committee every six weeks where a decision is made about whether to increase, decrease, or leave the Base Rate at its current level.
Inflation
The rate of inflation was at the same level as the year to April at 8.7% in the month to May this week.
This is still way above the Government’s target it has set the Bank – which is 2%. The 0.5% increase is more impactful than the usual 0.25% seen in recent times.
Many believed the Bank would spread rate rises over longer periods of time. Instead, the Bank has opted for a larger Base Rate rise than predicted which is why the inflation rate this time is higher.
Yet, inflation is still predicted to drop in the second half of the year with many hoping this provides some stability to the property market.
