The Bank of England usually increases interest rates when inflation is predicted to rise above their inflation target. Higher interest rates tend to moderate economic growth. Higher interest rates increase the cost of borrowing, reduce disposable income and therefore limit the growth in consumer spending. Higher interest rates tend to reduce inflationary pressures and cause an appreciation in the exchange rate.
But what impact will an interest rate have?
An interest rate rise of 0.25% will take the bank rate up to 0.5%, which is still a historically low figure. Existing borrowers whose mortgages are directly linked to the bank rate will see an instant increase in monthly repayments. For example, for those with a tracker mortgage linked directly to the Bank of England (BOE) rate, for every £50,000 of borrowing on a 20 year repayment mortgage, the interest rate change today would rise their payment increase by £6 per month*.
These predictions have already seen lenders withdrawing some of the lowest rates on the market and a rate rise could have a further impact on product availability. So if you're currently on a standard variable rate or your current deal is about to come to an end, it may be worth reviewing your mortgage needs with an adviser.
Please don't hesitate to contact us today to discuss what your options are.
*Indicative figure, calculations based on £50,000 borrowed over a 20 year term, with mortgage interest rates changing from 2% to 2.25%.