Despite conflicting data, the Bank of England raises interest rates from 0.1% to 0.25%.
With inflation hitting 5.1% yesterday, unemployment falling, and a booming housing market where growth is running at 10% annually (according to Nationwide Building Society) there is certainly much heat in the market.
However, that is also against the backdrop of GDP stalling to just 0.1% growth in October, increased restrictions since, and the US Federal Reserve withdrawing stimulus as US inflation is at 6.8% and set to raise interest rates next year.
This was never an easy decision for the Bank of England as whichever way they chose they would have been criticised, as perhaps moving rates as expected in November now looks like it would have been a more sensible move
What does this mean for mortgage rates? Don’t get caught out on a Discounted Variable deal. Any variable rate linked to the Bank of England will only move in line with changes the Bank of England makes, these are typically called Trackers and will update within a month of any change. What catches some people out are Discounted Rates, as these are typically linked to the lenders’ own Standard Variable Rate. While most lenders move their Variable Rate in line with the Bank of England, they don’t always do that. It can be by less, but it can also be by more. The way people get caught out is that lenders often change their variable rate the month AFTER the Bank of England makes a change, which means there are many Discount rates topping all the best buy tables for a good few weeks after a change in the Base Rate simply as they have not caught up yet.
Therefore, a borrower needs to look very carefully at key aspects. When did the lender last update their variable rate? What have they done previously? How much more do you think rates will go up to see if it works out cheaper?
For these reasons, it’s felt Discounted Variable deals are best left alone. A Fixed rate is simpler, and a Tracker rate is clearer. It’s a bit of an old-school practice with Discounted rates which are often used by smaller Building Societies but in a rising rate market it’s likely this will continue until rates stabilize again, which could be a good few years by the looks of things.
Look at the margin between Fixed and Variable Interest Rates. This is always the biggest hint of where lenders think rates are going over the next 2 – 5 years. In recent weeks, many lenders have introduced Tracker/Discount rates that are around 0.1% – 0.25% cheaper than the fixed rates they are offering. That is always a clear guide that rates are likely to rise, but more crucially, it can indicate by how much.
In a simple example, if a 2-year Tracker is 0.2% cheaper than a fixed rate, lenders expect rates to go up by at least 0.4%. It may start cheaper, then with a rate rise increase to the same level of the fixed-rate, but then another rate rise makes the Tracker more expensive. That way the lender collects the same level of interest (or more should rate go even higher) than on a fixed rate. So, a borrower may find picking a higher fixed rate at the start, may save them more money than a lower-priced Tracker.
As the Bank of England meets every 6 weeks, the real test will be next year. If inflation does start to come back toward the 2% target level the Bank of England set, there may be more interest rate rises, or tightening of other fiscal stimuli until that has been achieved. Some analysts expect a steady and slow rise in interest rates well into 2023 so these will be recurring themes from a mortgage perspective.
