top of page
Search

When the Bank of England Rate goes up, do Current Mortgage Rates go up as well?

So inflation still isn’t where the Government want it to be. Recent speculation would have it that the Bank of England may have to increase the base rate again in order to counter this. The Bank of England base rate is used as a tool to control inflation and stabilise the economy and is a crucial factor that affects the interest rates on mortgages offered by lenders in the UK. When the Bank of England raises its base rate, it typically results in changes to the interest rates that mortgage lenders offer. In this blog post, Zorria Mortgages will explore why this is the case and what it means for borrowers right now.




The Bank of England base rate is also the interest rate at which the Bank of England lends money to commercial and High Street banks. It is set by the Monetary Policy Committee (MPC), which meets regularly to review economic conditions and adjust the base rate accordingly. The base rate is used to influence the borrowing and lending rates of financial institutions in the UK i.e. what it costs for banks to borrow money from other banks. A higher base rate would normally mean that it costs more for banks to borrow money from the Bank of England, and they are likely to pass on that cost to customers in the form of higher lending rates.



When the base rate goes up, it traditionally meant that the cost of borrowing for lenders increased. Therefore, to maintain their profit margins, lenders would have to raise their interest rates on mortgages. The opposite had traditionally also been true. When the base rate goes down, it becomes cheaper for lenders to borrow money, and normally they are likely to pass on those savings to their customers by reducing their interest rates on the mortgages they offer.


However mortgage lending rates are influenced by a complex mix of factors, and may not always move in tandem with the Bank of England's base rate. As the Bank of England rate has only been going up since 16th Dec 2021 (from 0.25% to its current 4.25%), mortgage borrowers are largely unaware that for some reason the mortgage lending rates have actually been steadily coming down recently. This has been contributed towards by something called ‘Swap Rates’


Swap Rates refer to the interest rates that banks charge each other for borrowing money for a fixed term, usually ranging from two to ten years. These Swap Rates are an important benchmark for a range of financial products, including mortgages and is used by lenders when pricing their fixed rate mortgages. Therefore, in the context of mortgages, Swap Rates are used to determine the cost of the fixed-rate mortgage products that lenders offer their borrowers, which means that borrowers may pay a higher or lower interest rate depending on the prevailing Swap Rates at the time of their application.


It's worth noting that swap rates are not the same as the Bank of England base rate. While the base rate can influence the cost of borrowing for banks and other financial institutions, swap rates tend to be more closely tied to market conditions and investor sentiment. The sentiment of banks and investors after the government’s failed mini budget of September 2022 was low and very negative. This led to a lack of confidence in UK Sterling and the wider economy. This had a knock on affect in UK Swap Rates as they increased sharply at the time. This was inevitably followed by much higher mortgage interest rates than borrowers had become used to over the years.


Since subsequent corrective measures were introduced by a new chancellor after October 2022, more and more confidence has returned into the UK economy and whilst inflation remains high and the bank of England rate increases, in order to tackle this, Swap Rates remain lower than these periods of instability during the end of 2022 and beginning of 2023. Therefore lenders have gradually and slowly been reducing the cost of lending to other banks. These banks have subsequently passed on these savings by reducing interest rates offered to their borrowers.



Remember, the pricing of mortgage interest rates will be determined and influenced by several factors, not just Swap Rates. In a highly competitive market competition among lenders is also a consideration and lenders may choose to lower their current mortgage rates to attract borrowers and gain market share, even if the Bank of England's rate is going up. The interest rates offered to new borrowers may change frequently.


As speculation grows that the Bank of England may soon increase the base rate again, don’t let this be the deciding factor on whether to purchase now or not. Contact Zorria Mortgages and speak to a qualified advisor.



02476 311 370

07562 319 874


Your home may be repossessed if you do not keep up repayments on your mortgage

3 views0 comments

Kommentare


bottom of page