The Bank of England base rate has increased to a 13-year high, with the UK central bank predicting inflation could hit 10% in 2022
The UK central bank said it made the move to counter rocketing inflation, which it expects will hit a record 10% later this year.
But why does this mean mortgages will become more expensive?
Here’s everything you need to know.
Why does the Bank of England change interest rates?
Interest rates and inflation are closely linked – a decline in one tends to lead to a rise in the other and vice versa.
The Bank of England, which controls the UK’s monetary policy independently of the government, has a target of keeping inflation at 2%.
In a bid to lower this 30-year high figure, the bank increased baseline interest rates by 0.25% to 0.75% in March.
It raised them again to 1% in May.
This move increased the cost of borrowing in a bid to slow spending – although the Bank of England said it would take time to work and would not stop inflation peaking at 10%.
It has envisaged inflation would fall back to the target rate in “the next couple of years”.
However, economists think more interest rate rises are likely to be on their way, with predictions of a rate of between 2% to 3% by the end of 2023.
So the Bank of England will be unlikely to let inflation turn into deflation.
How do interest rates affect mortgage rates?
When you take out a mortgage, interest rates are what you pay on top of the amount you have borrowed to purchase your home.
You have to pay interest as it costs the lender to borrow money from the Bank of England and they will also want to maintain the value of the money you have borrowed from them.
While high street bank interest rates will be influenced by the Bank of England base rate, they will vary depending on other factors, such as how risky loaning money to you is.
The amount of interest also depends on whether you’re on a fixed rate mortgage or a variable rate one.
Those on fixed rates will have the level of interest they pay on top of what they’ve borrowed locked in for a specific time period.
The rate will have potential base rate rises factored in.
Those on variable rates will see their mortgage repayments change depending on how much the Bank of England alters rates by.
So, if you have a £130,000 mortgage and you want to pay it off over 25 years – if the interest rate on it is 2.5%, the monthly repayment will be £583.
As the interest rate has risen 0.25%, your monthly repayments will theoretically rise by £17 to £600.
Could interest rates affect public spending?
He also warned the cabinet that further borrowing risked making inflation worse, and advocated cutting the deficit to keep interest rates down.
The Times said Mr Sunak expected base interest rates to hit 2.5% over the next 12 months – a change which could see homeowners pay more than £1,000 extra a year if they were not on fixed-rate deals.
The Chancellor is reported to have said a one percentage point increase would equate to a rise of £700 in mortgage repayments.
What are the best mortgage rates at the moment?
Given interest rates have changed a lot over the past two years – falling dramatically to help the economy keep moving during the Covid-19 pandemic before rising rapidly to cope with rocketing inflation – mortgage rates have been moving around a lot.
Also, not all high street lenders display their interest rates online as some like to check your circumstances before listing their offering.
So it’s worth visiting high street bank websites to see what mortgage agreements they’re offering.