The Bank of England have today announced that they are raising interest rates from their record low of 0.25%, with a 7-2 vote in favour of increasing by a further 0.25% to now stand at 0.5%.
This is the first time that the Bank have increased Base Rate since July 2007 and means that there is now a whole generation of borrowers, lenders, estate agents, regulators and officials who are experiencing such a rise for the first time.
After a number of false starts it could be argued that the Bank of England Monetary Policy Committee, (MPC), had no choice to act in order to maintain credibility after a change in their rhetoric due to inflation remaining stubbornly above target, low unemployment figures and recent GDP figures showing an improvement, albeit a slight one.
Although there have been recent warnings that it would be premature to increase rates now given the uncertainty of the resilience of the UK economy, the Bank of England may also have been keen to provide an extra buffer in case they need to cut rates again should the Brexit negotiations fail to provide a suitable outcome.
Whilst this is a monumental move, the watch words will no doubt be slow and steady, with Carney stating that there could be two further quarter point rises over the next 3 years to get to 1% by 2020. The Committee will watch carefully to see what effect this move has on Consumer Spending.
Many retailers will be nervous about such a move going into their most important Christmas season and hope that this does not mean a long, cold winter as consumers reign in their spending, especially as the amount of consumer debt is at already high levels.
Whilst savers will rejoice at this decision, borrowers on a typical variable rate with a £250,000 mortgage could see their monthly payments increase by around £32 per month on a repayment basis or £52 per month interest only.
We expect to see lenders pass on the full increase to borrowers almost immediately, but with an increased number of mortgages now arranged on a fixed rate basis, the impact will not be as intense as it could be.
Speculation of this move has been well signposted, which means that this rate rise has already been priced in by markets, resulting in many lenders already having increased their fixed rate offerings over the last couple of weeks. However, the competitive pressure that exists in the mortgage market looks set to continue for the foreseeable future which will keep the market competitive.
We have already seen a number of new lenders on the scene including Sainsbury’s Bank and M&S coming in early next year to continue to put pressure on established lenders and recent new, tech-minded lenders such as Atom Bank.
For any borrower still on a variable rate or coming to the end of their current product term it makes sense to review your options sooner rather than later. Lenders have already begun to announce variable rate increases.
At present, 2-year fixes are available at 1.15%, (3.98% APRC) and 5-year fixes from 1.74%, (3.04% APRC) whilst variable tracker rates are around from 0.99%, (3.29% APRC).
Those looking at a Buy-To-Let mortgage can still obtain products from just 1.32%, (3.87% APRC) for a 2-year fix.