Are mortgage rates getting ready to rise?

29 October 2021

3 minute read

With energy, petrol, food and even toy prices all beginning to soar this year, every household budget is feeling the pinch.

Will the spike in inflation raise the cost of borrowing?

As a result, all eyes are on the Bank of England, who is projecting inflation to top 4% by the end of the year and weighing up whether to raise interest rates sooner than later. Andrew Bailey, Governor of the Bank of England, has already hinted that the base rate may need to change. “The recovery is weakening,” Bailey said recently to a group of UK economists. “A lot therefore turns on how effectively supply capacity is rebuilt and over what time, and how the labour market evolves. But there remain substantial uncertainties and we are monitoring the situation closely.”

Raising or lowering the base rate has a significant impact on businesses and households, as it is the yardstick for how much it will cost to borrow money. Currently the base rate is 0.1%, the lowest rate ever recorded, and we have not seen a rise in the rate for three years. If the base rate goes up, mortgage interest rates will quickly follow.

Liam Boardman, Senior Mortgage Adviser at Barclays Wealth & Investment Management, adds, “Mortgage prices are at historic lows, driven by the low interest rate environment and competition amongst mortgage lenders.” According to Liam, these low rates drive demand for borrowing. “The combination of the mortgage and housing market continue to fuel the UK public’s appetite for borrowing which is leading lenders to remain completive with pricing. At the start of October, Barclays also had rates starting from 0.85% subject to criteria being met”.

Although inflation rises are getting steeper, the Bank of England still maintains this surge of inflation is temporary – but this view may change. A good way to gauge which way the pendulum is swinging is to look at the Bank of England Monterey Policy Committee (MPC) minutes. The last time it met, they voted unanimously to keep the base rate at its current position.

Liam Boardman highlights that in the latest MPC minutes, the committee concluded that mortgage credit conditions in the UK had eased further, resulting in a fall in the cost of most mortgage products. He adds, “The number of mortgage products available have continued to improve, with availability for products with low loan-to-value (LTV) ratios now similar to pre-pandemic levels, although availability for products with high LTV ratios have remained below pre-pandemic levels.”

James Peto, Mortgage Team Leader at Barclays Wealth & Investment Management, acknowledges that for customers, the uncertain environment can be confusing. “With so many options available, it can be a minefield to navigate all the different mortgage products and fees,” James says. “Whether you have experience or not within the mortgage market, now is a really good time to seek advice on the options available.”

He also suggests anybody looking to buy or re-mortgage between now and spring should start looking sooner rather than later.

“With the next MPC meeting scheduled for 4 November, how they view the steep spike in household prices will determine if their perspective is shifting,” James adds. “Should the rates start to rise, the extra costs could make a purchase unaffordable. If you have a £500,000 mortgage your monthly repayments, over 25 years, will be £1,883 per month at 1%. At 1.5% this jumps to £2,000 per month, and at 2% repayments rise to £2,120 per month.”