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The Bank of England is set to announce its decision on whether interest rates will be cut later today as experts say the decision is “on a knife-edge.”
Some analysts are hoping the UK could see a small decrease from the 5.25 percent base rate to 5 percent. Borrowing costs are at the highest in 16 years, with the current rate holding steady since August last year.
The Bank has maintained this rate so far in response to the rising prices the UK has seen following the Covid pandemic. Inflation reached a record high of 11.1 percent in October 2022, as a cost of living crisis has gripped UK households for the past two years.
However, inflation returned to the Bank’s target of 2 percent in May, and stayed steady at this level in June. This doesn’t mean prices are declining to pre-pandemic levels, but they are now rising less quickly.
Some experts hope the return to a normal level of inflation could cause the Bank to cut interest rates. They say that higher interest rates are designed to help curb inflation, but they also affect savings and mortgages.
But what exactly is the relationship between interest rates, inflation, and how does it affect mortgage rates?
Interest rates and inflation
Interest rates are used by the Bank of England as a tool to help control inflation.
As of July 2024, rates are currently at 5.25 percent, having been held at the level for the past six votes by the Bank’s policymakers.
They were increased to this level to make it more expensive for people and businesses to borrow money, therefore weighing on their demand for goods.
This makes it hard for companies to keep increasing prices at the same rate, helping to contribute to the slowdown in inflation.
Rate-setters at the Bank look at the overall rate of inflation but also have a firm eye on specific areas, such as services inflation, which has been particularly sticky at 5.7 percent in May.
Interest rates and mortgages
Mortgage rates are agreed with individual borrowers and lenders, and are usually higher than the Bank of England’s base rate, though some types of mortgages follow movements in the Bank of England’s base rate.
Most people with a mortgage will be affected by a change in interest rates in some way. How exactly will depend on the type of mortgage, among a range of other factors.
Discounted, tracker and Standard Variable Rate (SVR) mortgages
A SVR is set by the mortgage lender and usually follows movements in the Bank of England’s base interest rate.
When interest rates rise, lenders are likely to pass this on to customers.
Tracker mortgages are another type of variable rate mortgage, but they’re linked to the Bank of England base rate. Rates may rise more on a tracker mortgage compared to an SVR.
For example, a tracker mortgage could be set 1 per cent above the base rate. In December 2021, this would mean a mortgage rate would be 1.1%. However, in June 2023, it would have risen to 6 per cent.
Fixed-rate mortgage
Mortgage rates on a fixed-rate will remain the same for the agreed period of time between borrower and lender, regardless of whether interest rates rise or fall.
Once the fixed term ends, borrowers are automatically moved to the mortgage lender’s SVR, which is affected by the Bank of England’s rates.
Source: independent.co.uk
