Will there be more interest rate increases in 2023?
On the 3rd August this year, the Bank of England continued its pattern of interest rate increases this year. They raised their base rate of interest from 5.00% to its current level of 5.25%. This marked its highest level since 2007 when the interest rate sat at 5.75% before the credit crunch in 2008.
August’s decision followed a pattern of steady interest rate increases which began in December 2021. It was at this time that the base rate made its first upward shift since August 2018. This was part of the recovery plan from the Covid-19 pandemic.
The question on everybody’s lips right now is whether or not to expect another base rate change before the end of 2023. On 21st September the Bank of England held their most recent monetary policy committee (MPC) meeting. During this meeting they voted 5-4 to keep rates at their 5.25% level. A very close decision as the markets expected an increase of 0.25% to be announced. Only last minute inflation news avoided this happening.
What is the likely outcome?
So far the general predictions are that a further 0.25% increase is the most likely outcome before the end of this year. Especially as the core rate of inflation for the UK was only slightly lower in August. This is according to the recently released inflation report from the Office of National Statistics (ONS). Also average UK wage increases now outpace the wider inflation rate of 6.2% which will encourage spending. Therefore, the Bank of England will be under pressure to continue to cool spending within the economy. They may do this via further interest rate hikes.
However, many believe that the Bank of England were too slow to react to the cost of living crisis and the rampant inflation earlier in the year. In hindsight, interest rates should have been increased sooner to mitigate the immediate blow to borrowers. As it stands, many experts feel that the Bank of England have been too slow to cut back on the rate increases. Instead, policy makers have continued to increase the base rate despite the economy starting to show signs of recovery. The Bank of England risk killing the momentum of their own recovery plan by doing this.
Who will be affected by further interest rate increases?
The impact of this is being strongly felt by mortgage customers. Especially those approaching the end of a low fixed rate mortgage product, or those on base rate linked tracker mortgages. For borrowers with mortgage deals coming to an end within the next 6 months, monthly repayments will be hundreds of pounds more than they are now. Additional rate increases will only compound this problem further.
E.g.
- A mortgage borrower, with a £200,000 repayment mortgage, currently pay £897 per month on a 2.50% fixed rate. This assumes a term of 25 years remaining.
- If their new rate is 5.75%, monthly repayments will increase to £1,258. Each 0.25% change in the rate offered equates to roughly £30 per month.
So the markets feel it is fairly certain that the Bank of England base rate will increase to 5.50% before the end of the year. However, some economists believe that the projected peak high for interest rates will be lower than initially thought. Some have put this figure at around 6.00% down from around 6.50% earlier in the year, and others even lower than this. Either way the rates are expected to peak in late 2023 or early 2024.
Savers on the other hand will continue to see a better overall return on their saving pots. This assumes that the financial institutions decide to pass on some or all of these increases to their customers. Many have been slow to pass on the interest rate increases to their customers but they are slowly getting there. Saving and investment account providers may soon start to compete for business more aggressively. They have more tools at their disposal to offer better deals than we have seen for a decade or so. Shopping around may soon be worthwhile again.
Tips for dealing with interest rate increases.
Secure a new deal early.
If you are an existing mortgage borrower with a fixed rate coming to an end within the next 6 months, look to secure a new deal as soon as possible. A large number of lenders allow an application to secure a new mortgage product up to 6 months in advance. Locking down an affordable deal now leaves the door open to switch to something better in a few months time should there be an improvement in the marketplace. If the rates were to stay the same, or increase before your remortgage date, you wont have to worry as you secured a better option as early as you could.
Right now, new shorter term fixed rates will cost a little more each month than the longer term 5 and 10 year options. However, you wont be locked in for too long. So if you feel that rates may be a little lower in 2025/6 this may time quite well. The risk is that rates may still be high in 2 years time and if that is the case then you could have paid less in the interim with a longer term deal
If you are not confident that 2 years is enough time for the economic issues to have worked themselves out, then a longer term fixed rate will be fine as long as it is affordable. Just be aware that should you spot a great new deal within a fixed rate period, there may be early repayment charges to pay in order to jump ship and secure a new rate.
Choose a new product term that fits your plan for the property.
Mortgage lenders have similarities with a casino. Lenders price their products so that they always win in the end. They are businesses who need to turn a profit after all. Predicting future interest rate increases / cuts requires a crystal ball, and our treasure chest is fresh out of crystal. However, the way mortgages are priced may offer an insight into what lenders feel will happen in the future.
Example
If a 10 year fixed rate is available at 5.00%, and a 2 year deal is at 6.00%, basic logic would say go for the 10 year deal. Mainly because it is cheaper from day one.
For the first two years at least you will have done well on the 10 year option. However, what if in two years time, a new 5 year deal is available for 3.50%. To start with, your mortgage lender will still have you paying the higher 5.00% sum. Secondly, you will have to pay a large fee to switch deals early. They have priced their range around an educated guess that this scenario would pan out. They are betting against long term higher interest rates.
During “normal” market conditions you can expect to see shorter term 2 year deals with the lowest initial cost. Lenders are happy to give you a good deal, but not for too long!. Generally speaking, the longer you fix a mortgage rate for, the higher the rate you will be offered. In these conditions the banks are betting that underlying rates may increase over that period or remain flat.
Try to choose a rate period that matches your future plans. If you plan to sell the house in 2 years, don’t be tempted by 5 or 10 year deals with lower rates. They will have large percentage based fees to break away early and you will erode any savings you may have made so far. Some mortgages can be taken to a new house without incurring fees but this is subject to the lender approving it at the time and is therefore not a guarantee.
Consider a variable rate / tracker if you feel rates have peaked.
Variable rates, such as trackers which “track” a margin over the Bank of England base rate as it moves up and down, are inherently risky products due to their volatile nature. If you had opted for a base rate tracker in early 2023, you would have seen your monthly mortgage repayment increase almost on a month-by-month basis. Only now are we starting to see the signs that this cycle is nearing its end.
However, once interest rate increases hit their assumed peak, a base rate tracker may look like an attractive option. Especially if you feel that interest rates will start to reduce over the next 2 years or so. Likewise, as the most attractive fixed rate alternatives are available over the longer terms such as 5 or 10 years at present, you may not want to tie yourself in for too long especially if rates do decide to drop back down a little.
If you are considering a tracker mortgage please read our guide here. There are deals available that have no minimum tie in periods. This means that you can switch to another product/lender at any time without penalty. These can also come with flexible features such as offset accounts to save interest using your savings. There is usually a small premium to pay for this flexibility when compared to a standard tracker.
Ask your lender if you can extend the term of the mortgage or switch to interest only.
Mortgage lenders have been asked by the UK government to help however they can. Give them a call to see if the term of the mortgage can be extended to help reduce the monthly repayment. This can always be adjusted to catch up at a later date when interest rates are lower.
Alternatively, a temporary switch to interest only may help. This means that your monthly repayments cover just the interest and wont reduce the balance. It should always be your aim to return to a full capital repayment mortgage as soon as possible. You will need to catch up on those missed capital payments to repay the mortgage within its planned term.
Spring clean your basic finances.
You may be facing a large increase in your mortgage repayments but there are ways to limit the impact. Luxury items like the full satellite TV package, ultrafast broadband, takeaways, and streaming entertainment packages are all nice to have but are a real drain on your finances. Generally speaking they only get more expensive over time. Temporarily cancelling these, or opting for a stripped down version can free up a decent chunk of monthly cash. Plus in many cases you may find that you don’t miss them as much as you thought you would.
Use the money saved to help pay down some of your debts such as credit card balances. Put some away for a rainy day and once you have a years worth saved in something like an ISA you could use this to make an overpayment to reduce you mortgage balance.
You can always reinstate the services later on if you wish. Provided that you are able to cope financially or if mortgage costs reduce in the future.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this post is purely for information purposes only and does not constitute advice.
