The Bank of England’s Monetary Policy Committee (MPC) has voted by a majority of 7 to 2 for the first increase in the UK base rate for a decade. In all honesty this move was flagged some time ago with Mark Carney, the governor of the Bank of England, talking about the need to reduce access to cheap finance and combat inflation. The base rate is expected to increase up to 1% by 2020 in what will be a gradual extended return to traditional base rate levels.
At this moment in time, although we await official confirmation, many mortgage companies have indicated that they will pass on the full rate rise to their variable rate mortgage holders. Those on fixed rates will enjoy the benefits until the fixed term comes to an end after which they will also be at the beck and call of the markets. It will obviously depend upon the size of an individual’s mortgage but on average experts believe that an additional £200 will be added to annual mortgage payments. While somewhere in the region of £20 a month may seem irrelevant, to those who are already struggling to make ends meet this is just an additional cost they could do without.
Some of the mass media have taken today’s interest rate rise as an excuse to create attention grabbing headlines such as “UK base rates double”. Yes, UK base rates have doubled but there have doubled from 0.25% up to 0.5%. Historically we have seen UK rate rises at similar levels to the actual base rate today. Surely that puts it into context?
It will be interest to see how savings rate are impacted by today’s interest rate rise on a day when the mass media have made “mistreatment” of savers one of their many headlines. Some of the popular press are suggesting an increase in savings interest payments of just £25 for every £10,000 of savings. If we were to estimate the average mortgage to be around £80,000 and base savings interest payments on this figure, this would hit the £200 level estimated increase in mortgage payments. In the previous example, with suggestions of a £25 increase in savings income for every £10,000 held on account, it is like comparing apples and pears by looking at the average mortgage.
Once the financial industry digests today’s increase in the base rate it will be interesting to see whether the relative increase in interest payments and interest received is the same. If savers receive a lesser relative increase, then the old argument that savers are being punished to increase bank margins on mortgages will surely resurface.
UK property market
Today’s increase in the UK base rate will only really impact those who pushed their financial boundaries to the limit in recent times. True, household budgets are under pressure from the rising cost of living, as well as minimal wage inflation, but it is financially prudent to leave some headroom between your financial obligations and income. The impact on the UK property market is likely to be more in terms of sentiment as opposed to financial especially with Brexit negotiations not exactly going to plan.