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Will interest rates rise, and what could this mean for mortgages? (Rightmove)

If you’re thinking of buying a home, or you’re coming to the end of your current mortgage deal, you might be wondering what’s going to happen to mortgage rates over the coming months. The Bank of England will announce their next decision on interest rates on 22 June. The Bank’s Monetary Policy Committee meets around every six weeks to vote on whether to change its Base Rate, and by how much. Base Rate matters because it affects how much money people can earn on their savings, as well as how much they pay to borrow money, including for mortgages.


In May, the Bank raised interest rates to 4.5% – the highest they’ve been for 14 years. The 12 consecutive rises we’ve seen since December 2021 aim to reduce high levels of inflation.


But even though we saw the Base Rate increase last month, this didn’t lead to an increase in mortgage rates, and rates remained flat for a period immediately after the announcement. Instead, it was the higher-than-expected inflation figures, announced on 24 May, that led to an unsettled period for the mortgage market, with rates rising rapidly.


The Government sets the Bank an inflation target of 2%, which is why it has said it will consider raising interest rates further, until inflation is under control. And although inflation had reduced from 10.1% to 8.7% in May, this was still higher than the markets were expecting, and has led to the opinion that interest rates will need to rise higher than originally thought.


And this stubbornly high inflation has caused swap rates – the underlying costs of mortgages for lenders – to increase by around 1% since the 24 May. These costs are now being passed on to borrowers: resulting in higher mortgage rates.


What could happen to interest rates?

Currently, market expectations are that the Bank is likely to increase rates again in June.


But energy costs are set to come down, and inflation is expected to fall to around 5% by the end of the year. So, it is possible that we could see the Base Rate peak at around 5.75%, as the Bank continues to monitor the long-term impact that consecutive rate rises are having on lowering inflation.


How are interest rate rises affecting mortgage rates?

Our mortgage expert, Matt Smith, says: “In the past fortnight average fixed rates have risen across all loan-to-value ranges. This is due to the increasing underlying costs of mortgages, in response to a lower-than-expected fall in inflation in May.


“Looking ahead, we anticipate an increase in Base Rate by up to 0.5% on 22 June, but lenders have already factored this into their mortgage rates with increases in recent weeks. Given the impact of the most recent inflation figures, the next publication of this data, on 21 June, is more likely to have an influence on the direction of mortgage rates in the immediate term.


“If inflation is aligned with, or exceeds the expectations of the financial markets, we can expect to see mortgage rates stabilise. But if inflation remains stubbornly high and additional Base Rate increases are anticipated, it’s likely we’ll see mortgage rates rise further”, he adds.


You can check the current UK mortgage rates here.


How could different types of mortgages be affected?

If you’re on a fixed-rate mortgage, the good news is that your payments won’t change, at least until the end of your current deal.


But if you’re on a fixed rate product that’s coming to an end in the next six months, you might want to see whether locking in a deal now could be a good option for you. As the cost of borrowing is a lot higher than it was five, or even two, years ago, it’s likely that you’ll be offered a higher rate, and with that, higher monthly repayments. A mortgage broker or your lender’s mortgage adviser will be able to advise you on which options best suit your personal circumstances.


And if you’re one of the estimated 15% of mortgage-holders on a tracker or variable mortgage, you’ll see your monthly payments go up fairly instantly. This is because tracker mortgages are normally set against the Bank’s interest rate, plus a percentage.


A benefit of a tracker or variable mortgage is that you may see your monthly payments start to drop after rates have reached their peak and start to come down.


When could interest rates start to drop?

Right now, it’s thought that we could see Base Rate peak at around 5.75%, before it starts to come down.


The Bank of England’s Monetary Policy Committee meets about every six weeks to discuss and vote on whether interest rates should go up or down, or stay the same.


The next decision on interest rates will be announced on 22 June, followed by 3 August 2023.


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