With the price of inflation increasing to its highest level in over a decade, the Bank of England Monetary Policy Committee (MPC) voted to increase the Bank of England Base Rate from 0.50% to 0.75% on March 17th, 2022. This change is in addition to the increases announced in December 2021 and February 2022.
What Is the Bank of England Base Rate?
The base rate describes the rate at which the Bank of England charges other banks and lenders when they borrow money – changes to the base rate are a way of influencing the UK economy. Consequently, this influences interest rates that lenders charge for their mortgages, loans, or other types of credit.
What Is the Monetary Policy Committee (MPC)?
The MPC sets monetary policy to meet inflation targets whilst helping to keep inflation low and stable. It affects how much prices are rising – this is called the rate of inflation. The UK Government’s target is to keep inflation at 2% to maintain a low and stable level.
The MPC’s decision on the Base Rate and any change to it is announced approximately every 6 weeks. At the time of writing, the current inflation rate is 5.5% and the current base rate is at 0.75%.
How Will The Interest Rate Change Affect Mortgage Rates?
Monthly mortgage payments may be affected by the change. Any changes will vary, depending on the type of loan taken out.
Fixed Rate Mortgage
Payments will remain the same until the end of the fixed period. However, at the end of this period, it is likely that payments will change, where generally this type of mortgage moves over to a variable rate.
Standard Variable Rate (SVR)
On this type of mortgage, the interest rate is set by the lender. These rates can change at any time including when the base rate changes.
This type of variable rate mortgage tracks the base rate of the Bank of England. Therefore, in this case, it is likely that payments will change in line with the changes to the base rate.
This type of mortgage allows you to link your savings to the balance and can be used to reduce the amount of interest. An Offset mortgage also tracks the base rate, making it likely that payments will indeed change. This will vary, however depending on the overall amount of the savings.
If you are worried about keeping up your mortgage repayments, we can offer mortgage advice. For clients on SVR mortgages, we can offer a free review to see what other options may be available. Get in touch today for more information on our services.