Interest rates rise to 4.5%: what could this mean for mortgage rates?


The Bank of England (BoE) has announced an increase of 0.25% to its Base Rate this month. This is the 12th consecutive rise and has pushed interest rates to 4.5%, which is the highest they’ve been for almost 15 years.

The Bank keeps raising interest rates to tackle high levels of inflation. The UK inflation rate wasn’t expected to remain as high as 10.1% in the year to March. And it’s still way above the target the Government sets for the Bank, which is 2%.

But in the Monetary Policy Committee’s analysis of the UK economy, which was released at the same time as the interest rate decision, the Bank has said it expects inflation to fall quickly, to around 5% by the end of this year, and to meet the 2% target by late 2024.

It also says it’s likely that the prices of some things such as food will be rising faster than this, but energy bills should come down as gas prices have fallen a lot recently.

The Bank is reflecting the forecasts from the financial markets, which have factored in the Base Rate peaking at around 4.75% in the autumn. In the absence of any unexpected shocks to the economy, it now looks like rates will remain at or around the current level for longer, before slowly coming back down.

How might today’s interest rate rise impact mortgage rates?

Over the last couple of weeks, average fixed-rate mortgage rates have been slowly edging up in anticipation of the Base Rate rising to 4.5%.

The Base Rate is a major factor for lenders when they set their fixed-rate mortgages. Lenders set these rates based on the market’s view of what Base Rate will be in two, five or even 10 years’ time. These are called ‘swap rates’.

Our mortgage expert Matt Smith says: “There is unlikely to be any immediate changes in lender rates based on today’s decision, and lenders are instead likely to wait to see what impact the Bank’s comments on the outlook of the economy will have on swap rates.”

In terms of current mortgage rates, an average five-year fixed 85% Loan-To-Value (LTV) mortgage rate is now 4.52%, up from 4.44% last week.

“To put this into context, this amounts to a difference of £14 a month for someone purchasing an average property and spreading the cost over 25 years. So, while we may continue to see fixed-deals fluctuate slightly up or down in the short-term, home-buyers coming to market soon may find that the amount they need to repay each month doesn’t change significantly,” says Matt.

Find out what the current UK mortgage rates are, and what they could mean for average monthly repayments if you were to take out a mortgage right now.

What if I’m a first-time buyer?

Demand from home-buyers looking to move is now higher than pre-pandemic levels, most notably in the typical first-time buyer sector. So it’s likely we will see lenders try to remain competitive to meet this demand, to try and help this group of buyers purchase their first home.

Matt says: “We’re also starting to see creative ways some lenders are trying to help segments of the market get onto the ladder with the launch of Skipton Building Society’s 100% mortgage product. While it is clearly designed to target a very specific segment of the first-time buyer market, given the affordability challenges many first-time buyers face, short-term innovations such as this are welcome to try and help more would-be first-time buyers.”

What does the Base Rate increase mean for my current mortgage?

Changes to the Bank’s Base Rate can impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. However, if you’re on a variable or tracker mortgage, your payments will almost certainly go up.

Matt says: “Those on a tracker mortgage will be more disappointed with today’s news, as they may have thought that the Base Rate had peaked in March given some of the positive signs for the wider economy, and this is another cost they will need to factor into their monthly budget when the full rate rise is passed on.”

The Bank of England’s next interest rate announcement is scheduled for Thursday 22 June.

READ MORE: How often do interest rates change?

The header image of this article is provided courtesy of Period Homes, Ingatestone