Mortgage Rates: How UK Interest Rates Impact You?
After keeping interest rates at 5.25% for seven consecutive meetings, the Bank of England eventually lowered them to 5% at its August meeting. Millions of people in the UK have their savings, credit card, and mortgage rates impacted by interest rates. Although rates have dropped for the first time since the UK went into the first Covid lockdown in March 2020, borrowing costs are still quite high.
Why do interest rates fluctuate and what does it mean?
An interest rate indicates the cost of borrowing money as well as the return on savings. The interest rate that the Bank of England charges other lenders for loans is known as its base rate.
This affects the interest that consumers pay on savings accounts and the costs that other banks charge for lending like mortgages. The Bank of England adjusts interest rates in order to manage inflation in the United Kingdom, which is the gradual rise in prices for goods and services. The Bank may choose to boost rates in order to maintain inflation at or close to the 2% objective when it is high.
The goal is to incentivise people to spend less in order to lower demand and hence lower inflation. When this begins to occur, the Bank may decide to hold or lower rates.
When will interest rates in the UK drop even lower?
After several months at 5.25%, the highest rate in sixteen years, the bank’s current rate is 5%. But for most of the 1980s and 1990s, it was much higher than this, peaking at 17% in November 1979.
Today’s inflation is significantly lower than October 2022’s peak of 11.1%.
The primary indicator of inflation, the CPI, increased little to 2.2% in the year ending in July, although this was mostly anticipated, and prices are still rising more slowly than they will in 2022 and 2023.
After August’s rate announcement, Andrew Bailey, governor of the Bank of England, stated: “We were able to lower interest rates today because inflationary pressures have decreased enough.”However, he cautioned: “We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much.”
When determining how to adjust rates, the Bank takes into account additional inflation metrics, some of which are still higher than it would like. In certain segments of the economy, such as the services sector (which encompasses everything from eateries to hair salons), there have been more notable price increases in recent months.
It must strike a balance between the necessity to restrain price increases and the possibility of hurting the economy. It also must avoid lowering rates only to have to raise them quickly back up.
To what extent can interest rates decline?
Despite momentarily exceeding the Bank of England’s 2% target in May and June, inflation in the UK is predicted to increase slightly this year before declining again in early 2025.
Therefore, it is challenging to forecast with precision what will happen to interest rates. The International Monetary Fund (IMF) said in May that by the end of 2025, interest rates in the UK should drop to 3.5%. The group, which gives members advice on how to strengthen their economies, agreed that the Bank needed to strike a balance between avoiding making too many cuts before inflation is under control.
However, the IMF cautioned in its most recent prediction that ongoing inflation in nations like the US and the UK would force interest rates to remain “higher for even longer”.
Interest rates: How do they impact me?
mortgage interest rates
The government’s English Housing Survey indicates that little less than one-third of households own a mortgage. The mortgage rate of over 500,000 households “tracks” the rate set by the Bank of England. Their average monthly repayment will decrease by £28 as a result of the 0.25 percentage point reduction.
The payments of everyone with a regular variable rate mortgage will decrease by approximately £15. However, over 80% of mortgage clients have fixed-rate agreements. Their future transactions are impacted, but not their monthly payments.
According to Moneyfacts, a financial information organisation, the average two-year fixed mortgage rate is currently 5.77%, which is significantly higher than it has been for the majority of the previous ten years.
This implies that compared to borrowing the same amount a few years ago, homebuyers and those refinancing must pay significantly more.
There has been pressure on specific building societies and banks to charge their clients higher interest rates.
Loans and credit cards
Interest rates set by the Bank of England also affect credit card, bank, and auto loan rates. If lenders anticipate that the Bank of England will raise interest rates, they may choose to increase their rates. The cost of interest payments could decrease, though, if rates drop.
Conserve
The interest rate set by the Bank of England has an impact on savers’ potential earnings. There has been pressure on specific banks and building societies to raise interest rates for their clients.