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When will interest rates go up or be cut?
In summary: The Bank of England (BOE) made emergency interest rate cuts on the 11th and 19th March 2020, to try and reduce the economic impact of the coronavirus outbreak. The BOE slashed interest rates from 0.75% to 0.25 and then from 0.25% to just 0.1%, the lowest level on record. The move was unexpected and the Bank of England stressed that it would unlikely cut interest rates further, as it would seek to keep rates above 0%. The emergency interest rate cut is a temporary measure and the last time rates were cut in the same way (after the Brexit referendum) they only remained at historic lows for 15 months before the BOE began raising interest rates again. Below I explain what you should be doing now, in light of the emergency interest rate cut, before going on to explain what will determine when interest rates will go back up again.
Should you fix your mortgage rate now?
With interest rates at historic lows, you should seriously consider whether to fix your mortgage now. Historically the best fixed-rate mortgage deals quickly disappear as soon as there is any sign that the BOE might raise interest rates and there is no certainty over how long interest rates will remain at 0.1%. If you are wondering whether you should fix your mortgage rate now then reading the rest of this article will help you decide. However, the simplest route, which I'd strongly recommend, is to speak to a mortgage adviser. If you don't know a mortgage adviser whose opinion you trust, then follow these simple steps to get a free mortgage review in 30 seconds from a vetted FCA regulated mortgage professional:
- Click the link above
- Answer the four quick questions about your situation
- Enter your email etc
- Then select the “Review my Mortgage” button
It's as easy as that. Then an expert mortgage adviser will check if you are eligible to remortgage for free and with no obligation. They will also tell you precisely how much you could save. Typically the free remortgage check saves people around £80 per month per £100,000 of mortgage.
A simple and easy way to see whether you can get a better mortgage rate and save thousands.Get a free mortgage review
How the Bank of England base rate is set
The Monetary Policy Committee (the MPC) is the nine-person committee, within the BOE, that determines the BOE base rate. Usually, on the first or second Thursday of most months, the Bank of England announces the MPC's interest rate decision. You can find a full schedule of decision dates on the Bank of England website. Whenever a decision is announced the MPC meeting minutes are also published. These minutes are scrutinised by investors for any hints of when rates might go up or down in the future. For example, they would see how many of the nine-person committee voted for interest rates to go up, down or stay the same.
The forecasting of the Bank of England base rate has been transformed in recent years. The former Governor of the Bank of England (BOE), Mark Carney, originally created a notional link between the UK unemployment rate and the BOE base rate. In a pledge to keep rates lower for longer he said that rates would not rise until UK unemployment fell below 7%. But that threshold was hit, somewhat unexpectedly, so Mark Carney had to ditch the unemployment trigger when it was breached, instead replacing it with 18 economic indicators which still inform the BOE's interest rate decision making today under the new Governor, Andrew Bailey.
When does the market think mortgage rates will next rise or be cut?
The Bank of England has moved the goalposts numerous times, in recent years, on when interest rates will likely go up. Of course, when interest rates rise or fall mortgage rates will follow suit. Below is a short potted history to highlight how we have go to where we are today:
- Interest rates were slashed after the financial crisis in 2007/2008, from over 5% down to 0.5%, in order to support the UK economy.
- After much speculation that interest rates would finally go back up in 2015 it didn't happen because inflation suddenly turned negative. For an economy to attain a healthy level of growth the BOE aims for an official inflation target of 2%. Raising rates tends to send inflation lower, therefore the BOE left them on hold.
- As we entered 2016 the BOE stated that it was not the time to raise interest rates as the UK economy was not strong enough. As a result, the expected date of the first interest rate rise since the financial crisis moved from early 2017 to early 2020! Yet all this was prior to the UK's EU referendum.
- The Brexit vote was a huge game-changer. The previous talk was all about when interest rates would go up. Suddenly the talk was that because the UK had decided to leave the European Union there was a chance of an economic slump. The Bank of England was so concerned that it decided to cut interest rates from 0.5% to 0.25% in August 2016 and launch a new bout of Quantitative Easing (QE) to try and stimulate economic growth.
- Minutes from the August 2016 meeting stated that most members of the MPC expected another interest rate cut, possibly to 0%, before the end of 2016. This never materialised.
- Yet the UK economy proved surprisingly resilient after the EU referendum. It led some people, even the then Prime Minister Theresa May, to suggest that the BOE overreacted when it cut interest rates.
- The fall in the value of the pound since the Brexit vote caused inflation to increase. Obviously, high inflation tends to lead to higher interest rates.
- The Bank of England was so concerned about inflation that in June 2017 it revealed that the interest rate committee (known as the MPC) almost decided to raise interest rates. This sent markets into a bit of frenzy that interest rates would go up in 2017. But inflation then unexpectedly dipped as there were renewed signs of weakness in the UK's economic growth as a result of the Brexit vote.
- The Bank of England finally raised interest rates in November 2017 for the first time in over a decade, back to 0.5%.
- Then in August 2018 the Bank of England raised the bank base rate from 0.5% to 0.75% as the economic outlook improved. This was the highest level in almost a decade.
- In January 2020 a number of MPC members hinted to the press that they were considering voting for an interest rate cut at the next rate-setting meeting as concerns grew over UK economic growth.
- However, the arrival of the COVID-19 pandemic changed everything and the BOE carried out two emergency interest rate cuts in March 2020, first from 0.75% to 0.25% and then from 0.25% to 0.1%.
The indicators to watch that will determine when interest rates go up or down
The BOE uses a number of economic indicators when deciding whether rates will rise or be cut. So understanding the key economic indicators is important when judging when interest and mortgage rates are likely to rise or be cut. Below is a roundup of the most important indicators to keep an eye on. Of course in the short term the impact of the coronavirus on the UK economy is likely to have the largest influence over where interest rates go next.
- Inflation is still below the official target – UK inflation has fallen sharply in recent months and now sits 0.6%. This is well below the official 2% target rate but means that the cost of living is still higher than this time last year. But, if inflation remains below the official target the BOE may be inclined to cut interest rates (if it can), to spur economic growth and inflation.
- Official support for low rates is unanimous – Over the last two years the MPC’s preferred path for interest rates was clearly for them to move steadily upwards. However, this dramatically changed in March when the MPC announced an emergency interest rate cut, down to the historic low of 0.1%. In June 2020 the MPC voted unanimously to keep the bank base rate at the historic low of 0.1%.
- The UK economy has slumped – Since the Brexit referendum UK economic activity had proved surprisingly resilient although 2017 was the worst year for economic expansion since 2012. We experienced a rebound in economic growth during 2018 which continued into 2019. However, the impact of the coronavirus outbreak clouds things and the BOE's emergency rate cuts aim to stave off a future recession. The Office of National Statistics has stated that the UK economy shrank 2.2% in the first quarter of 2020, compared to the previous quarter, which is the worst performance since 1979. Weak economic growth reduces the chance of an interest rate rise, so until economic growth improves an interest rate rise seems unlikely.
- Unemployment is rising – the number of people out of work continues to rise and in the three months to June the UK unemployment rate hit 3.9%. However, this data doesn't take into account the full impact of the coronavirus pandemic. More up-to-date data on the number of new unemployment claims suggests that more than 2million people applied for unemployment benefit between March and April. This suggests that the official unemployment number will soon spiral. Weak employment numbers reduce the chances of an interest rate rise. Therefore the economic impact of the coronavirus (increased unemployment) will likely mean that interest rates could stay lower for longer.
- UK economic growth forecasts are being cut – The Bank of England has warned that the UK is facing its worst economic recession on record. It is predicting that the UK economy may shrink by a record 25% in the second quarter of 2020. Weak economic growth prospects reduce the chances of an interest rate rise.
The new rules that could stop you remortgaging
The ability to remortgage and/or fix your mortgage has become a bit more difficult over recent years as the rules surrounding the affordability tests when applying for a mortgage were tightened slightly. Lenders always had to make sure borrowers could still afford to pay the mortgage if interest rates went up. However, if you were simply remortgaging lenders didn't have to apply the more stringent affordability tests. Some lenders did just that which made remortgaging a bit easier. But new rules removed this option for lenders which could end up leaving some borrowers stranded on their existing deals which is why it's important to calculate the impact of an interest rate rise and seek advice from a mortgage expert by following the steps below. It will take you a few seconds but could prevent your mortgage repayments crippling your finances in the future and help you lock into low rates while they are still available.
If you are planning on fixing your mortgage rate when interest rates do start going up further the new rules may prevent you – leaving you stranded on your existing deal with your mortgage repayments rising in line with the bank base rate or your lender's whim.
Step 1 – Calculate the impact on your monthly mortgage payments
Quickly calculate the impact of an interest rate rise on your mortgage payments with this interest rate rise calculator. Just enter the original details of your mortgage, such as the original amount borrowed and the original term to be able to see how your monthly mortgage payments could change based on different interest rate rises.
So let's say for example that back in 2007 I borrowed £200,000 for 30 years at a rate of 5%, which has since dropped to 2.5% (the lender's standard variable rate). In the calculator I would enter the original loan amount (£200,000 on a repayment basis), the original term (30 years) and the current rate of interest (2.5%). The Bank of England base rate is currently 0.75%. So let's say I want to see the impact if the base rate increased by 4.5% (to 5% – which is the historic long-term average) I just enter 4.5% into the ‘anticipated rate change' box and click calculate.
The result shown below the interest rate rise calculator tells you that my current mortgage repayment would increase from £790 a month to £1,331 a month. That's an extra £541 a month that I'd need to find!
Once you have the result move on to step 2 below.
Quickly find out how much your mortgage payments will increase or decrease by when interest rates changeUse the free calculator
Step 2 – The best way to find out your mortgage options
Consumers are unaware of the new rules and the fact they could leave some people stranded on their current deals. At best their mortgage repayments will increase in line with the Bank of England base rate, at worst at the whim of their lender.
Most consumers will wrongly assume that using a price comparison site is the best thing to do when looking to remortgage. However, bear in mind
- many mortgage deals are only available via mortgage advisers so don't appear on price comparison sites
- not everyone can get the rates quoted on price comparison sites
- price comparison sites don't take into account your credit rating or personal circumstances which will determine whether a lender will actually lend to you. For example you may not be eligible for the deals quoted by comparison sites and won't find out until they credit check you. That in itself will then hinder future mortgage applications
That is why you are almost always better off dealing with an independent mortgage adviser rather than going it alone. This is why 70% of borrowers now use a mortgage adviser to find the best deal from a lender who will actually lend to them. Therefore, we recommend getting in contact with a mortgage advisor yourself. You can arrange a free remortgage review in just 30 seconds using this online tool.
If you already have an independent mortgage broker that you trust then I suggest you get in touch with them as there has never been a better time to remortgage.