Bank of England Interest Rate Rise in 2023

As of September 21st 2023, the Bank of England has announced that interest base-rates have remained at 5.25%.

It is certainly true that if interest rates rise so will the cost of borrowing. However, the correlation between the two are not always that straight forward for your mortgage.

In the current market, whilst the base rate has risen, lenders have actually been reducing their fixed rates. There could be a number of reasons for this.

1. Lender appetite: i.e. if they want to lend they need to ensure they are offering good rates to get customers to borrow.
2. Also, market confidence. If the city and money markets have confidence in the Government’s plans moving forward, this will be reflected in the price of money.

For those on variable rates it is likely that any rise in the base rate will be reflected in a rise to your mortgage rate. If you are tracked to the Bank of England base rate, then the increase will mirror that exactly.

You could however find that your increase could be more than this if you are on your lenders standard variable rate (SVR). The lender’s themselves have full control over their own SVRs.

One other aspect that can be affected, is a lender’s decision of how much you can afford to borrow.  If enquiring about a new mortgage or an increase to your present borrowing, a lender will assess your affordability.

To determine your affordability a stress rate is used by the lender that is calculated at a margin above the current interest rate environment.  Typically, therefore, the higher we see the base rate go the less you could be able to borrow.

Are high interest rates still on track to fall this year

The Bank of England’s role is to maintain inflation at 2%.  With inflation falling but still currently sitting closer to 7% they have taken measures to increase the base rate to look to bring this down.

Inflation has been falling but, only slightly. So, if inflation gets back down, or starts to get back down to 2% does this mean interest rates will fall?  Sadly, there is no clear answer to this one I’m afraid.  Certainly, we should start to see the base rate stabilize. If the economic outlook is right then yes, the current perception is that the base rate should start to drop.

The Bank of England currently predict that the base rate may have reached its peak however they have warned against “complacency” and “premature celebration” explaining “we’ve got a long way to go to bring inflation down to the Bank’s target”.

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What will happen to house prices as interest rates rise

Property prices are the same as most other commodities in that the prices will be determined by supply and demand.  If you have more supply than demand, then prices will always fall. This is because the seller has to bring the price to a level that means a buyer will feel they can afford to buy it.

As interest rates rise it likely results in the cost of borrowing rising.  It can also impact on the availability of mortgages.  Both of these result in fewer people looking to buy.  The result therefore is a fall in demand and a drop in property prices.

Whilst we are seeing this happen now, it is perhaps not at a rate that some predicted.  Sellers are still wanting to sell at prices quoted to them a few months back and buyers are more minded that the price they pay should be less.  As such we find ourselves in a position of slow adjustment rather than the landslide some forecast.

However, we are a small island with a growing population and for many of us homeownership is something we are educated as being as good thing.  With this in mind demand is rarely weakened sufficiently enough to see big falls in house prices.

If interest rates continue to rise this may dampen availability and affordability.   But with lenders still showing an appetite to lend, actual mortgage rates are holding firm. Greater flexibility is also being shown in assessing affordability meaning borrowers will likely still proceed if able.

What mortgage types are suitable whilst the interest rate is rising

What looks obvious to many is that a fixed rate mortgage is most suitable.  However, whilst this may give you certainty of what you are to be charged for a given period of time, it’s not necessarily the best course of action for all circumstances.

Always ensure you take your personal situation into consideration when selecting your mortgage rate.  For example, how much flexibility do you need for making overpayments or what are your moving plans in the near future.  Each of these could influence what rate you apply for.

Also consider how high you feel interest rate may rise.  A variable rate could still give better value over a fixed rate if rates do not rise too sharply.  Do however ensure you are comfortable with the risks involved with a rise in your payment and that your budget can allow this.

If unsure it is always best to get advice from a professional.  Our adviser’s at Just Mortgage Brokers are all CeMap qualified so are well positioned to guide you to the most suited product.

How interest rates affect affordability

There are two aspects of affordability.  The first is your own i.e. how much you feel you can afford.  The other is the lender’s assessment of affordability.  Interest rates consistently affect both.

A mortgage is typically most people’s largest monthly expenditure. Any increase in how much this costs, can play a significant part in a person’s disposable budget. Therefore, the higher the interest rate you are charged the tighter your affordability will become.

From a lenders perspective, interest rates also play their part in how they assess your affordability. When deciding how much you can borrow a lender will use two gauges.

One is what is referred to as an income multiple. This is a calculation applied to your income to work out how much you can borrow.  Historically you would expect something along the lines of 3x the highest income plus 1x the lower or 2.5 x joint.

In the current market you can expect much closer to at least 4.5x sole or joint incomes and with some going to 5x or 5.5x.  Availability has been up to 7x income albeit on very restrictive basis.  As you can see, things have had to change with the market conditions over the years.

An income multiple is only one part of a lenders assessment.  Offering someone 5 times their income for a repayment mortgage term of 10 years will be much more expensive each month than someone borrowing 5x over a 35 year term.

Therefore, a lender will also apply an affordability assessment to establish if what you have to pay each month will be affordable.  This calculation uses what is referred to as a stress rate.

This rate is higher than the current variable rate at the time so if interest rates rise so will the rate a lender uses for their affordability assessment. So, if interest rates are higher it could result in a lender feeling you can afford to borrow less.

How can Just Mortgage Brokers help

All of our advisers at Just Mortgage Brokers and with any of our associated partners are full qualified.  Whilst no one has that crystal ball to predict what the future holds, their expertise and knowledge of what is going on in the mortgage industry can be priceless.

As noted earlier, even though the base rate is on the rise this does not necessarily mean that mortgage rates follow suit.  Mortgage advisers can also be knowledgeable from the insight they receive from lenders directly with what they have planned in the future in regard to their rates and criteria.

Feeling happy that you have obtained the most appropriate mortgage is important to you. Seeking the advice and recommendation from a professional, especially in a turbulent market, could be the best decision you .

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