- First Choice Accountancy
A rise on UK Interest Rates this week
Borrowing money in the UK has been cheaper than it ever was but perhaps not for much longer.
The country's main interest rate, set by the Bank Of England, has been below 1% since 2009, in the wake of the global financial crisis.
In March 2020, as the coronavirus pandemic caused the biggest economic slowdown for centuries, the rate was cut to an all-time low of 0.1%.
But now the tide is turning and that era of ultra-cheap money could be coming to an end.
The first in a series of rate rises could come early as this week, with the Bank's rate-setting Monetary Policy Committee due to pronounce on Thursday.
If it does lift interest rates, many people with a mortgage will face higher repayments, since lenders will seek to increase their rates in line with the Bank's decision.
However, savers will be hoping for a better return on their money.
What would Interest Rate rise achieve ?
The main point of making it more expensive to borrow money is to curb inflation - the rate at which prices are rising.
As the UK economy recovers from the impact of Covid, consumers have more money to spend. That pent-up demand is pushing up the cost of a whole range of goods, some of which are in short supply because of the way in which factors such as the pandemic and Brexit have disrupted supply chains.
That's bad news for the Bank, which has a mandate to keep the annual rate of inflation at 2%.
If it goes as high as 3% or as low as 1%, the Bank's governor, Andrew Bailey, has to write a letter to Chancellor Rishi Sunak to explain why and what he is going to do about it.
We are already in that territory, since inflation is currently at 3.1% and the Bank expects it to rise further, hitting 4% or even 5% before subsiding again.
If the Bank puts interest rates up, the effect is to persuade people not to borrow and spend. Instead, consumers will tend to save, because returns from savings are higher.
With less disposable income being spent, the economy slows and inflation goes down again.
What are the drawbacks ?
Interest rates can be a bit of a blunt instrument. If they go up too far and too fast, that can choke off economic recovery and even cause a recession.
The Bank has been sitting on its hands in recent months, taking the view that the burst of inflation will be short-lived and will fix itself without the need for intervention.
Markets now expect the UK's main interest rate to rise from 0.1% to 0.25% in the first instance, with further increases to follow, perhaps reaching the pre-covid level of 0.75% by the middle of 2022.
Those expectations are already having a direct impact on the mortgage market, with borrowers trying to lock in a low rate on five-year fixed deals while they still can, while some of the best deals are already disappearing.
How would mortgage holders be affected by a rate rise ?
Some 74% of mortgage holders are on fixed-rate deals, so would only see a change in their repayments when their current term ends.
Of the remainder, 850,000 homeowners are on tracker deals, which usually move in line with Bank rate changes.
The other 1.1 million are on standard variable rates, often because they have been automatically moved at the end of their fixed-deal term. The rate of interest they pay can be changed at any time by their lender, as is often then case if the Bank rate is altered.
Were there to be a 0.25 percentage point rise in rates, this would translate to approximately an additional £26-a-month mortgage payment on average for a tracker rate customer and £16 for the typical borrower on an SVR.
Plummer, R., 2021. Why UK interest rates could rise this week. [online] BBC News. Available at: <https://www.bbc.co.uk/news/business-59119921> [Accessed 2 November 2021].