Is a rate rise on the cards again?

Is a rate rise on the cards again?

It’s been just over a decade since interest rates last rose in the UK, meaning that many homeowners with mortgages will never have experienced a rate increase.

The Bank of England’s Monetary Policy Committee last lifted rates in July 2007, taking the base rate to 5.75 per cent before the financial crisis caused it to plummet. By March 2009, interest rates had fallen to just 0.5 per cent. They remained at this level until August 2016 when, following the UK’s vote to leave the European Union, the Committee vote to trim rates to 0.25 per cent as part of a major stimulus package to prevent the economy destabilising.

To give some idea of the magnitude of impact the drop in rates has had, consider someone with a hypothetical rate of 2 percentage points above base rate. A £150,000 25-year repayment mortgage at a rate of 7.75 per cent would have paid £1,133 per month in 2007. The same mortgage today, at a rate of 2.25 per cent, would cost nearly half this at just £654 a month.

Are rates about to increase? 

Recent months have seen growing speculation that a rate rise could be imminent, with many economists predicting that we may see an increase as early as November.

Mark Carney, governor of the Bank of England,  has done nothing to allay these thoughts, warning in September that some perhaps do not fully appreciate that rates could rise “over the coming months”. The MPC at that point voted by seven to two members against changing rates in a bid to support economic growth.

It is worth noting though that Mark Carney has previously hinted that a rate rise may be on the cards, only for rates to then hold steady, so there are certainly no guarantees that an increase will happen.

However, the general consensus among economists seems to be that rates will rise, with 31 out of 50 economists in a Reuters poll forecasting a rate hike at November’s meeting. In contrast, in a poll taken ahead of the September meeting, only three out of 59 economists predicted an increase before the end of the year.

Percentage point rise prediction

Nationwide Building Society has said it also expects a quarter percentage point rise in November, but sees any increase only having a “modest” effect on already stretched UK households. This is mainly due to the fact that the majority of new mortgages taken out in recent years have been fixed rate deals that protect homeowners from higher monthly payments when interest rates rise. 

However, there are plenty of households who are on variable rate deals and whether an increase takes place or not next month, it is vital for borrowers to ensure they are prepared for higher rates.

The expectation of a rate rise has pushed up swap rates – one of the factors that will determine how lenders price their fixed rates. This has led a growing list of lenders to hike their fixed rate mortgage deals, typically by around the 0.20 percentage point mark, although some fixes have gone up by more than this.