This article is continually updated to bring you the latest analysis on when interest rates are likely to rise or be cut. Sign-up to our newsletter to receive updates to your inbox.
When will interest rates go up?
In summary: The Bank of England (BOE) base rate currently sits at a historic low of 0.1% after two emergency interest rate cuts in 2020, to try and reduce the economic impact of the coronavirus outbreak. The emergency interest rate cut was intended as a temporary measure and there is rising concern that the BOE may be forced to raise interest rates as early as the first quarter of 2022 (to 0.25%) to quell rising inflation which sits at 3.2%, well above the BOE's own annual target of 2%.
Below I explain what you should be doing now 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 before replacing this with 18 economic indicators which still inform the BOE's interest rate decision making today, under current 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 this 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 interest rates unchanged.
- The Brexit vote was a huge game-changer. The previous talk was all about when interest rates would go up. Suddenly the talk became concerned with the chance of an economic slump because the UK had decided to leave the European Union. 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.
- 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 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.
- 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%.
- In November 2020 the BOE was so concerned about the impact of the coronavirus pandemic on the UK economy that it launched a new round of Quantitative Easing worth £150bn.
- Now in 2021 investment markets have finally ruled out the BOE cutting its base rate to 0%, or below, this year. In fact, there is growing concern that interest rates might have to rise to quell rising inflation which is now above the BOE's official target of 2%. The market was pricing in a BOE interest rate rise at the end of 2022 at the earliest but this has now changed. The market is now pricing that the BOE base rate could rise to 0.25% by the first quarter of 2022.
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 above the official target – In August UK inflation leapt by the highest amount since records began and now sits at 3.2%. It means that inflation is now well above the official 2% target rate (having been as low as 0.7% in March) and the cost of living is higher than this time last year. The BOE has also forecast that inflation will hit 4% later this year, but it should be only temporary. But the concern is that if inflation keeps rising then the BOE may be forced to raise interest rates, sooner than it would like, to dampen inflation.
- Official support for low rates is still unanimous – In recent years the MPC’s preferred path for interest rates was clearly for them to move steadily upwards. However, this dramatically changed in 2020 when the MPC announced emergency interest rate cuts, down to the historic low of 0.1%, while also introducing a new round of Quantitative Easing. At each subsequent meeting, the MPC has voted unanimously to keep interest rates and its QE programme unchanged. However, senior members of the MPC have stated that they may have to raise rates sooner than previously thought.
- The UK economy slumped but is rebounding – The coronavirus outbreak sent the UK economy into its first recession since 2009. It meant that the UK economy contracted by 9.9% in 2020, which was the biggest annual decline on record. With the UK starting 2021 in another national lockdown there was concern that the UK could experience its second recession in a year. However, the UK economy is now expanding with the economy growing 4.8% between April and June 2021, which means that UK GDP should hit its pre-pandemic level by the end of the year. The strength of the rebound will ultimately impact where interest rates go next. Weak economic growth reduces the chance of an interest rate rise while strong economic growth makes an interest rate rise more likely in order to avoid the economy overheating.
- Unemployment is falling – the number of people employed grew by 183,000 in the three months to July 2021. This means that the UK unemployment rate now sits at 4.6%, the lowest level since August 2020 but still above the pre-pandemic level. Weak employment numbers reduce the chances of an interest rate rise.
- UK economic growth forecasts are being increased – The Bank of England had warned that the UK will take time to recover from its recession in 2020. However, it is now predicting that by the end of 2021 the UK economy will have grown by 7.25% during the year, up from the 5% forecast it made in February 2021, and the highest rate in 70 years. The BOE has also increased its 2022 GDP forecast to 6%. Strong economic growth prospects increase the chances of an interest rate rise.
The 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 mortgage 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 0.1%. So let's say I want to see the impact if the base rate increased by 4.9% (to 5% – which is the historic long-term average) I just enter 4.9% 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 £1,385 a month. That's an extra £844 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.
Further reading – should you fix your mortgage rate now
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