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Mortgage interest rates up by 0.5% to 5%

Last week, the Bank of England voted for the 13th consecutive UK interest rate rise to 5% - how will this affect UK homeowners?

A photo of Daniel Sharpe-Szunko, the author

By Daniel Sharpe-Szunko

Published on: 3 July 2023

6 min read

Mortgage interest rates up by 0.5% to 5%

Last week, the Bank of England (BoE) announced it would increase mortgage interest rates by 0.5% to 5% in the United Kingdom. This marks the 13th consecutive rate increase and more despair for British homeowners and landlords.

The government are now being called to act to help support struggling households and provide something for those in financial difficulty. Here we look at how the mortgage interest rates have come to this point and what to expect for the rest of this year.

We’ll also explain what to do if you’re struggling to meet your mortgage repayments as well as options you might have to remortgage your home.

What is the Bank of England base rate?

The Bank of England base rate is the interest rate (also known as the mortgage interest rate) that the Bank of England uses for lending money to UK banks, building societies and lending organisations. The interest rates are set and reviewed every 6 weeks by the Monetary Policy Committee (MPC) at which its members vote for the next interest rate increase, decrease or no change.

Any increase in the Bank of England base rate (BBR) usually signals an immediate increase to the mortgage rates, but conversely savings rates would also increase.

Why has the mortgage interest rate gone up?

Interest rate predictions earlier in 2023 suggested that the mortgage interest rates would reach a maximum of 4.5% this year. Unfortunately, inflation rates have fallen far short of the expected target levels of 3% and still remain above 8% in June.

The Monetary Policy Committee (MPC) met last week to vote on the base rate for June and of its nine members, a majority of 7 to 2 voted for a 0.5% increase to 5%. It was widely predicted that the base rate would increase by a further 0.25% which is why 0.5% was such a shock to so many.

The rate increase was a direct result of higher than expected inflation rates in the United Kingdom, which currently sits at 8.7% in the year to May. Previously, the MPC had set a target figure of 2% for inflation to help growth and boost employment. The current rate of 8.7% falls a long way short of that target figure, and hence the need for increased mortgage rates to help sustain and underpin the UK economy.

The latest predictions suggest that the Bank of England will continue to monitor inflation and we could see a further increase of 0.25% to 0.5% in the next review.

Bank of England interest rate summary: December 2021 to now

We’re keen to show how the rates have changed over the past 18 months which you can clearly see in the table below.

We’ve also attached a graph (below) from the Bank of England website which also shows the trend of the interest rate from around 2008, which is when it was last at 5.0%. We have experienced unprecedented movement in the mortgage interest rate over the past 15 years, with the lowest rates in history and to almost pre-financial crash levels as they are now.

Bank of England graph showing interest rate data 2008-2023

Interest rate table December 2021 to present day:

Bank of England review dateInterest rate before changeInterest rate changeInterest rate after changeMortgage payment change for £100K loans*
16/12/20210.10%+ 0.15%0.25%£8
02/02/20220.25%+ 0.25%0.50%£13
17/03/20220.50%+ 0.25%0.75%£13
05/05/20220.75%+ 0.25%1.00%£13
16/06/20221.00%+ 0.25%1.25%£13
04/08/20221.25%+ 0.25%1.75%£13
22/09/20221.75%+ 0.50%2.25%£26
02/11/20222.25%+ 0.50%3.00%£26
15/12/20223.00%+ 0.75%3.50%£39
02/02/20233.50%+ 0.50%4.00%£26
23/03/20234.00%+ 0.25%4.25%£13
11/05/20234.25%+ 0.25%4.50%£13
22/06/20234.50%+ 0.50%5.00%£26

What is going to happen to my mortgage interest rate?

There are several different options and potential outcomes for mortgage borrowers in the UK from the recent interest rate increase. The upshot is that the impact of this depends on where you are in your mortgage timeline.

Standard Variable Rate (SVR) mortgage borrowers

If you currently have a mortgage which is currently sat on the lenders Standard Variable Rate (SVR), then you should be considering your options. There are several key reasons why you can and should review your mortgage at this point, including:

It might be worth speaking to a qualified mortgage expert at this point to see whether you could benefit from a lower mortgage deal or rate.

Discount or tracker rate mortgage borrowers

Many mortgage borrowers opted for a discount or tracker rate mortgage over the past several years due to interest rate uncertainty. Now could be an opportunity to review your mortgage to see whether you could fix on a lower rate to save you money in the long-term.

Many discount and tracker deals have smaller or no early repayment charges and therefore can allow you to move with little or no penalty.

Fixed rate mortgage borrowers

Borrowers who currently have a fixed rate mortgage deal will be less worried about current interest rates. However, this is something that should be considered in the long-term and certainly for any borrowers with less than 6 months remaining on their fixed rate deal.

What can I do with my mortgage?

As we’ve mentioned above, there are several possible outcomes with the new interest rate and how that can impact current or future mortgage repayments. If you have a mortgage that is currently outside of any Early Repayment Charge period or doesn’t have an ERC, then you can review at any time.

It is well worth regularly reviewing your mortgage situation in the current climate to make sure that your deal is right. There are a number of potential options for most mortgage borrowers, depending on your deal and any penalties that apply.

Here are some options for mortgage borrowers:

1. Contact your existing lender (e.g. bank or building society)

2. Speak to a qualified mortgage expert

3. Search for mortgage deals online

4. Speak to your accountant (if self-employed)

Is there any help available if I can’t afford my mortgage?

You won’t be alone if you’re struggling to make repayments on your mortgage in the current climate. Millions of mortgage borrowers are expected to have significant difficulty in being able to afford their higher mortgage repayments.

Mortgage lenders have a responsibility to help their customers and support them through periods of financial difficulty. It is essential that you seek guidance before you are unable to make your mortgage payments and prevent any missed repayments.

There are several potential options when you speak to your mortgage lender:

  • Mortgage payment holidays can be granted to some borrowers that might be experiencing a temporary financial difficulty. Mortgage lenders will usually add any interest charges to the end of your mortgage deal and extend the term (adding to the overall cost of borrowing)
  • Convert to an interest only mortgage can also be an option to reduce your monthly repayments by express permission from your lender. This is less likely in the current mortgage market unless you can prove a repayment vehicle or for buy-to-let properties
  • Extend your mortgage term can also be an option with some lenders which may reduce your mortgage payments to become more affordable for you

Other organisations that might be able to support you:

Whenever interest rates go up, it usually means good things for savers as it often means that savings rates will increase. There is often a delay or lag between where mortgage interest rates increase and savings interest rates go up.

You should speak to your bank or building society to find out whether they have or will be increasing savings rates. One of the biggest beneficiaries of the recent interest rate increases are Annuity Rates which have seen significant improvements for many savers.

Does the interest rate affect credit cards, loans and overdrafts?

The simple answer is that it is highly likely that the cost of borrowing will increase for most financial agreements, including loans, credit cards and overdrafts. It is likely that you will see an increase in the Annual Percentage Rate (APR) to most types of borrowing across all types of lending.

There are several options for reducing your overall credit repayments such as switching your credit cards to 0% with a balance transfer. Make sure that you properly check any terms and conditions to ensure that this is affordable and does not compound any interest charges.

More mortgage news

Below we have more recent mortgage news affecting UK homeowners and aspiring buyers in 2023.

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