When can we expect interest rates to either increase or decrease? Here are the current projections of 2023
On February 2nd, 2023 the Bank of England (BOE) took the historic step to boost the base rate from 3.5% to 4%, its highest level in 14 years!
When will interest rates change?
In an effort to reduce the UK's annual inflation rate, standing at 10.1%, far above its target of 2%, the Bank of England took the step of raising interest rates.
According to the market analysis, a further rise in interest rates is expected over the next two years. The Bank of England base rate will peak at 4.6% by July 2023, then gradually decrease until reaching 3.5% after approximately five years have passed. It is worrying to note that the Bank of England's (BOE) base rate peak projection has gone up in comparison to just a few weeks ago as doubts mount regarding whether or not they will have to raise the base rate more forcefully than what was earlier predicted to keep inflation at bay.
At this moment, the typical interest rate on a 2-year fixed-rate mortgage is 5.15%. Nevertheless, if the Bank of England raises its base charge faster than anticipated, mortgage rates will likely climb even higher.
On the 23rd of March in 2023, the Bank of England will convene to review their decision on what level to set interest rates. Before delving into what will influence when interest rates rise, I'll first provide an overview of the actions you should take now.
Is now the time to fix your mortgage rate?
With the BOE base rate set at 4%, and experts expecting further increases, you should strongly consider fixing your mortgage if you're concerned about how much higher rates may go or whether you can afford to keep up with your repayments. If you're shopping for a mortgage, the average 2 year fixed rate hovers around 5.15%. However, if your loan-to-value ratio is 60%, then the best rate available to you stands at an impressive 4.2%!
If you're currently on a fixed-rate mortgage and the period is not yet due to expire for another 6 months, it's possible to secure an affordable rate now that will begin when your present fixed agreement terminates. This saves you from having to pay costly early redemption fees imposed by your existing lender.
Whenever the Bank of England hints at a possible interest rate increase, the most competitive fixed-rate mortgages will be snapped up before you can even blink.
To make the most informed decision on your mortgage, I highly suggest consulting a mortgage adviser as soon as possible. Their expertise will be invaluable to sorting through all of the alternatives such as variable rate and tracker mortgages. If you don't know a mortgage adviser, we can certainly help. Click here to book a call with one of our friendly and knowledgeable mortgage and protection advisers.
Understanding the Procedure Behind Setting the Bank of England Base Rate.
The Bank of England's (BOE) Monetary Policy Committee is a nine-member body that makes decisions on the BOE base rate. This committee plays an integral role in setting monetary policy and guiding economic growth within the UK. Every six weeks, the Bank of England declares its Monetary Policy Committee's interest rate determination. To find a full timeline of when decisions will be released, please click here. When the Monetary Policy Committee (MPC) reveals a decision, its discussion and deliberations are also made public in the form of meeting minutes. Investors analyse these minutes carefully for any hints of potential rate adjustments in the near or distant future. As an example, they would gain insight into how many members of the nine-person committee favoured increasing, decreasing or steadying interest rates.
In recent years, the Bank of England base rate has undergone a remarkable transformation in terms of its forecasting capabilities. Mark Carney, once Governor of the Bank of England (BOE), initially tied the UK's unemployment rate with BOE base rates. But then Andrew Bailey took over as Governor and replaced this connection with 18 economic indicators that continue to guide the BOE's interest rate decisions today.
When can we expect to see mortgage rates move up or down?
The Bank of England has shifted its predictions multiple times in recent years, concerning when interest rates will likely ascend. Unsurprisingly, mortgage rates are closely linked to fluctuations in interest rates. Whenever the cost of borrowing changes, so too will the rate of mortgages. Below is a short timeline of how the base rate and the UK economy have changed over the last 15 years:
- To promote the UK economy, interest rates dropped from over 5% to a mere 0.5% following the financial crisis of 2007/2008.
- Anticipation for an uptick in interest rates ran high throughout 2015, yet inflation unexpectedly dropped and the expected increase never occurred. For an economy to experience consistent growth, the Bank of England (BOE) has set its official inflation target at 2%. By raising rates, it keeps inflation in check; thus the BOE decided to leave interest rates untouched.
- The Brexit vote was a monumental moment of transformation. Before the referendum, everyone was discussing how soon interest rates would climb. Unexpectedly, the conversation shifted to the probability of an economic crisis due to Britain's exit from the European Union. In August 2016, the Bank of England felt such trepidation that it chose to reduce interest rates from 0.5% to 0.25%, as well as launch a fresh cycle of Quantitative Easing (QE) to encourage economic expansion.
- After the EU referendum, UK's economy shocked many by exhibiting remarkable resilience. This led some experts, including Prime Minister Theresa May to assume that Bank of England overreacted in their decision to reduce interest rates.
- After more than 10 years, the Bank of England ultimately decided to increase interest rates in November 2017 - bringing them back up to 0.5%.
- In August 2018, the Bank of England lifted its bank base rate from 0.5% to a decade-high of 0.75%, as economic conditions brightened up significantly.
- The COVID-19 pandemic upended the world with a single blow, and in response to it, the BOE decided on two significant emergency interest rate cuts. These were initially from 0.75% down to 0.25%, then further sublated to just 0.1%.
- From December 2021 to February 2023, the Bank of England (BOE) has raised its base rate consecutively at 10 meetings, more than quadrupling it from 0.1% to 4%, which serves as the greatest benchmark in 14 years. The BOE is striving to decrease inflation which currently stands well above their target goal of 2%.
To stay ahead of the curve, keep an eye out for any shifts in interest rates and understand which signs will indicate when they are on their way up or down.
When attempting to determine whether rates will rise or drop, the Bank of England (BOE) examines a selection of economic indicators. Consequently, understanding these essential signs is critical when predicting if mortgage and interest rates are prone to go up or down. Here's an overview of the most influential markers that you should be mindful of:
- Inflation is far exceeding the intended target rate.
The rate of inflation in the UK has decreased to 10.1%, down from its 41-year peak of 11.1% marked back in October 2022, which is a promising sign for economic recovery. Inflation remains significantly higher than the Bank of England's 2% target rate and the cost of living is much more expensive when compared to one year ago. Initially, the BOE had proposed that this inflation rise would be temporary but now they have come to understand it will continue for quite some time - subsequently raising interest rates ten times between December 2021 and February 2023. If inflation remains consistent, this trend will likely continue into the first half of 2023.
- Governmental backing for low rates has dissipated.
At the Monetary Policy Committee (MPC) meeting on February 2023, a vote was cast and tallied to decide whether or not interest rates should be raised. Seven out of nine members voted in favor of an increase from 3.5% to 0.5%, with two voting against it. As it was a majority decision, the bank base rate rose accordingly - from 3.5% up to 4%. The Monetary Policy Committee (MPC) has made a remarkable move, raising the base rate for ten successive meetings. At their February meeting, the Bank of England declared that they shall only continue to raise interest rates if inflation remains constant.
- The UK economy is perilously close to recession and in need of urgent action.
The UK economy plunged 9.9% in 2020, when the coronavirus outbreak first hit, causing its biggest annual economic decline on record since 2009. Although this was a significant setback, the nation bounced back strongly with 7.5% growth in 2021 and 4% increase in 2022 - surpassing pre-Covid levels! Ultimately, it is this magnitude of these figures which will determine where interest rates move next for Britain's economy. Unexpectedly, the UK economy experienced a 0.2% decrease in GDP during the third quarter of 2022, leading to worries that an economic downturn would arrive in Q4. Fortunately though, despite no growth being recorded at the end of 2022, this was still enough to prevent entering into recessionary territory which is defined as two consecutive quarters with negative growth. The UK economy is dangerously close to the brink of recession, an unfortunate reality that has been acknowledged by the Bank of England itself. Weaker economic growth hinders any potential increase in interest rates while sustained and healthy expansion can lead to higher interest rate hikes as a means of preventing over-stimulation.
- Unemployment levels have risen again
In the three months leading up to January, 74,000 new jobs were created - however, unemployment rates still hovered at a six-month high of 3.7%. Wages are rising and employment numbers increasing; both signs point toward an impending raise in interest rates. Conversely, if employment figures do not remain strong then it is less likely that there will be a rate increase.
- The UK economy is now predicted to experience a prolonged yet milder recession, according to the latest economic growth forecasts.
Last November, the Bank of England forecast that Britain would enter into a two-year recession - one which was further corroborated by forecasts from the International Monetary Fund and OECD. However, following February's policy meeting, their projections shifted with regards to the depth of said recession; they suggested it wouldn't be as severe as initially anticipated.
What should I do?
In recent years, it has become more difficult to re-mortgage or fix your mortgage due to stricter affordability tests when applying for a loan. To avoid being trapped in an unfavourable deal, you must take the time to consider how a potential rise in interest rates would affect you and consult with an experienced mortgage specialist. By adhering to these steps, you can ensure that remortgaging or fixing your mortgage is as stress-free and beneficial as possible! Whether you are on a tracker, variable, or fixed-rate mortgage, it only takes a few seconds to take the steps below and protect your finances from crippling future payments. Additionally, this may help you secure low rates while they are still available.
- Calculate how your monthly mortgage payments will be affected.
Calculate the effects of a higher interest rate on your mortgage payments with our handy mortgage repayment calculator! Check it out here
Simply enter your mortgage's original amount and term into the calculator to uncover how much different interest rate increases could impact your monthly payments.
For example, You've taken out a loan of £200,000 for thirty years at a variable rate. In the calculator, enter this information: the principal amount (£200K on a payback basis), the period (thirty years) and your current interest rate (4%). If you're curious about how a 1% increase in Bank of England's base rate - up to 5%, which is its long-term average - would affect things, simply input 1% into the 'anticipated change' box; press calculate!
With our mortgage repayments calculator, you can see that your mortgage payments could potentially increase from £955 to £1,074 - a total of an additional £119 per month. Are you prepared and equipped with enough funds to meet this requirement?
Even if you have a fixed-rate mortgage, your monthly payments won't increase with the Bank of England base rate increase. Nonetheless, when it comes time to remortgage, how much higher will your payments be? Thus, let us consider the same figures from above but with a mortgage at 2.5% fixed rate that is due for expiration shortly.
When you enter the details of your original mortgage, be sure to factor in the difference between the Bank of England base rate when you got your fixed-rate mortgage (0.1%) and where it's estimated to be once it comes time for remortgaging. Doing this will help ensure a more accurate ‘anticipated rate change’ figure on all future mortgages.
Therefore, set the 'anticipated rate of change' to 4.3%, anticipating that the BOE base rate will reach a high of 4.4% in 2023. Once your fixed-rate mortgage lapses and it's time for remortgaging, you must understand that monthly payments could increase from £790 - reaching as much as £1,304 per month! This equates to an extra sum of approximately £514 each month—a significant figure requiring adequate financial preparation beforehand.
While this guide provides an estimate of your new mortgage payments, it is important to remember that the size of your mortgage will likely decrease as a result of past monthly repayments.
Once you have the result move on to step 2 below.
- Let's find the best mortgage options.
Too many customers don't know the latest regulations, and unfortunately, this could leave some borrowers stranded with their current deal. The best possible outcome is that their mortgage payments will rise in connection with the Bank of England base rate; however, a more unfortunate situation may arise where lenders dictate an even higher interest rate.
- Although it may seem logical to use a price comparison site when you're looking for the best remortgage deal, don't be so quick to jump the gun.
- Mortgage advisers often have exclusive deals that can't be found on price comparison websites, making them the go-to source to find the best possible loan rates. Don't get fooled by the rates seen on price comparison websites - not everyone can access them!
- While price comparison sites make it easy to compare different mortgage options, they don't take into account your personal credit rating or individual circumstances when making their recommendations. This can lead to you not being eligible for the lowest rate deals quoted by these sites, and you won’t know until a lender has already performed a credit check on you. Such an occurrence could have long-term repercussions that negatively affect future mortgage applications.
In most cases, it is much more beneficial to work with an independent mortgage adviser than trying to tackle the process on your own. With 70% of borrowers now relying on a mortgage advisor for obtaining the best deal from a lender who will accommodate them, consulting one yourself is strongly suggested. At Hello Mortgage we offer free initial advice and will walk every step of the way with you. Book a call today