The UK mortgage market is highly competitive, and its ability to react to change and make decisions rapidly is what has multiplied this competitiveness. The vast options available, from your standard residential mortgages to your specialist bridging products, creates an opportunity for any situation.
Whether you are looking for property development finance, bridging finance, high-value finance or are simply looking for the best options for your house move, Articus Finance is here to assist. Talk to the team now.
In this blog, we take a closer look at the realities of mortgage rates rising, mortgage rate forecasts and mortgage rate predictions to help you make an informed decision about the future of your mortgage.
What is currently happening with UK interest rates?
On 22nd September 2022, The Bank of England (BOE) raised interest rates to 2.25 per cent, making this the sixth rise since December 2021 with more rises imminent.
The Monetary Policy Committee (MPC) will meet two more times this year (they can arrange emergency meetings should they wish) and markets are predicting that the BOE base rate will rise above 3% by the end of 2022, peaking at 5% at the summer of 2023, followed by a slow decrease.
Why are the UK interest rates rising?
Global – and national – inflation has caused the cost of living to spiral out of control and added to the uncertain environment we currently live in. Although the government has a number of instruments to combat inflation, interest rate fluctuations are their most direct ‘weapon’. Inflation is targeted at a stable 2% and is defined as the rise or fall in the prices of a typical basket of goods purchased by a household – it is measured by the Consumer Price Index (CPI).
Higher interest rates make it more expensive for people to borrow money whilst also encouraging people to save. The result is that, overall, people will tend to spend less, meaning prices will stop rising over time to correct for the falling demand.
According to the BOE, rising energy prices are one of the main reasons why inflation is rising so severely. Since May, the cost of gas has doubled. Currently, the inflation rate is 9.9 per cent. However, those price rises will push inflation even higher over the next few months to around 13%.
This rise in inflation has significantly affected businesses, meaning their higher costs are being passed onto consumers. The UK saw a partial boom in most industries over the past two years; unemployment was at an almost record low and wages were rising. Although this sounds positive – which it is in many ways – it has added to the burden currently felt by businesses.
That being said, Economists believe that Interest rates are going up. Given where interest rates stand at present, there’s a definite trend towards an uptick in the base rate. The real question is: By how much? At the upper end of the scale, some analysts are forecasting a rise to as much as 4,5 per cent by Summer 2023.
Fixed-rate mortgages versus variable-rate mortgages in the UK
Fixed-rate mortgages diminish the risk of interest rate rises and are especially popular during times of uncertainty. It gives borrowers the much-needed comfort of consistent and predictable monthly payments for the foreseeable future.
According to analysts – and what has also been seen by our brokers, there has been a higher tendency from owner occupiers to opt for longer-term fixed rates mortgages in order to attempt to try and ensure stability in home finances and avoid any future uncertainty.
Discounted variable rates fluctuate depending on the broader economic and financial markets, the BOE base rate is generally the closest benchmark to the fluctuations. However, be aware that each lender has the precedent for raising or lowering their variable rates whenever they see fit. Variable rates may also seem attractive initially as they can be heavily discounted when compared to the closest fixed rates, plus the fact that there are rarely any early repayment charges. Of course, you are assuming that the product interest rates will not rise higher than the fixed rates over the term. As we’ve mentioned, your situation/plan is paramount when securing either a fixed or variable rate.
Homeowners, developers and investors must continue to be diligent in these trying financial times and ensure they plan ahead and take suitable advice. Should your fixed-rate expire soon, it is crucial to think ahead and contact your broker in advance to ensure there is enough time to explore the most suitable refinancing options – mainly when the rates are likely to continue to increase.
Choosing to fix your mortgage or opt for a variable rate during uncertain/unpredictable times like this requires advice and forward-thinking. Our mortgage brokers will consider your situation, plans and other factors that may come into play. This will allow them to advise on the best product or plan for you.
Should I fix my mortgage for 2 Years, 5 years or longer?
The advice we have been giving to our clients – as always – is dependent on their attitude to risk and plans for the next short, medium and long term. Putting your home at risk to attempt to absorb a rate rise that many unknown variables could influence could be considered risky. For the first time in decades, we are seeing more expensive two-year fixed-rate products compared with five-year fixed rates. Historically the cost increases as your fix for longer due to the risk being lower.
This tells us that lenders are predicting expensive borrowing in the short term (0-2 years) but cheaper borrowing in the medium to long term (2-10 years).
The reason the mortgage is ‘fixed’ is that the bank sets early repayment charges. These early repayment charges are the risk of fixing for too long. Typically the early repayment charges will reduce the closer you get to the end of the product. For example, a £1,000,000 with a five-year fixed rate product would incur early repayment charges similar to the below:
- Year 1: 5% (£50,000)
- Year 2: 4% (£40,000)
- Year 3: 3% (£30,000)
- Year 4: 2% (£20,000)
- Year 5: 1% (£10,000)
Understanding how a change in interest rates could impact your ability to pay is essential. You can contact Articus Finance anytime to help determine how your monthly payments might be affected.
In case you are unsure what are the best options for your mortgage. We strongly recommend you speak to one of our mortgage advisers as soon as possible.
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