Mortgage Market and Bank Rates

On the 15th of December 2022 the Bank of England raised interest rates from 3.0% to 3.5%. The 0.5% increase was the ninth rise since December 2021 when the rate stood at just 0.1%. It has put the Bank rate at its highest level since 2008 and has applied further upward pressure on the cost of borrowing.

Mortgage costs also rocketed following last September’s ill-fated mini-Budget due to sterling volatility and market uncertainty. Major lenders including Barclays, HSBC, Halifax and Nationwide all pulled deals and brought them back to the market at higher prices.

The appointment of Rishi Sunak as Prime Minister helped to settle the markets and the average cost of fixed rate mortgages has been continuing to come down from its peak.

The rates have been dropping and currently you can get a 2-year fixed rate at 4.49% with a 40% deposit, or a 5-year fixed rate at 4.19%. This compares to average highs of more than 6.50% in October.

Currently, long-term fixes are cheapest with the best 10-year fixed rate deal priced at 4.10%.

The average two-year tracker rate today stands at 4.08%, while a typical standard variable rate (SVR) is 6.45%.

At present, there are around 4,000 residential mortgage deals on the market. The number has increased since last Autumn’s mini-Budget when it plummeted to 2,560. Yet it’s still a far cry from the 5,300-plus deals on the market in December 2021, before interest rates began to climb.

A settling political landscape alongside the slight fall in the annual rate of inflation to 10.5% could ease pressure on the Bank of England to raise interest rates further in 2023.

The next decision to be taken by the Bank’s Monetary Policy Committee (MPC) is scheduled for 2 February 2023.

So what do rising interest rates mean for you?

The estimated two million homeowners on variable rate deals, such as Trackers or Standard Variable Rates, will see an almost immediate rise in their monthly repayments following the latest Bank rate rise to 3.5%. As an example, a tracker rate rising from 4% to 4.5% costs around an extra £50 a month on a £200,000 loan.

Those on fixed-rate deals, where the interest rate is locked in for, say, two or five years, won’t see any difference in their monthly payments. But when their deal comes to an end, they may find they have to pay a higher rate for their next mortgage because of recent increases in the main Bank rate.

The Bank’s MPC uses interest hikes as a means of cooling the economy and taming rising inflation. The Consumer Prices Index (CPI) rose to a heady 11.1% in the 12 months to October. And while it eased back in November to 10.7%, and again in December to its current 10.5%, these figures should be set in the context of the government’s target of 2%.

If inflation remains stubbornly high, some forecasters are suggesting that Bank rate could reach 4.5% this year.

One of the main current drivers behind rising inflation is the cost of energy. Under regulator Ofgem’s energy price cap, annual bills for a typical-use household would have rocketed to £3,549 from 1 October, and further still to £4,279 from 1 January 2023.

But the government has superseded the price cap with its own ‘cheaper’ Energy Price Guarantee (EPG). This limits typical annual bills to £2,500 until 31 March 2023, followed by £3,000 from 1 April 2023 for a further 12 months.

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