Friday, 21 January 2022

Mortgage interest rates rise to curb inflation

THE Bank of England raised interest rates from 0.1 per cent to 0.25 per cent in December — the first rise in three years — and some homeowners are now facing increased mortgage repayment costs as a result.

Andrew Bailey, governor of the Bank of England, said the rise was needed to tackle strong inflationary pressures building up in the economy.

UK inflation is running at 5.1 per cent, the highest rate in a decade, largely driven by the rise in wholesale gas prices which are increasing domestic energy bills.

Simon Gammon, managing partner of Knight Frank Finance, said: “By raising the base rate it’s clear that the Bank of England believes the economy will shrug off most of the effects of Omicron. Getting a grip on rising inflation appears to be the number one priority.

“Mortgage rates on the high street have been edging upwards during recent weeks in anticipation of this moment and it’s clear the lenders believe there could be at least one more hike in the base rate.

“Although mortgage rates have been rising, they remain very competitive by historic standards. Our advice to borrowers is to get an offer locked in now. They are often valid for six months and can easily be amended should it be possible to lock in a more favourable deal at a later date.”

Martin Lewis, founder of, said: “A UK base rate rise was widely flagged last month, but it didn’t happen. This month, with the rise of Omicron and a hit on the economy, far fewer expected it, but the bank surprised us.

“While the rise itself isn’t huge, the signal is. For the bank to overcome its inertia says a lot. This is the first rate rise in three years — and I suspect it’s indicating it’s only the beginning, more are to come.

“The rise is, of course, driven by high inflation. Prices are rising at their fastest rate for years and the Bank of England is charged with preventing that happening. By increasing interest rates the theory says you encourage saving and discourage borrowing, taking cash out of the economy and slowing things down.

“The problem is that it’s the price of fuel and energy which is driving inflation. That is a global problem, unlikely to be fixed by unilateral UK moves. Plus, we know already that come April, there will be a likely 40 per cent rise in the energy price cap, regardless of what the bank does. So we have to wait and see if its interest rate lever is powerful enough to lift things back into place.

“In practical terms, I’m afraid it is likely mortgage holders stand to lose more than savers gain. For variable rate mortgage holders, the typical £8 per month rise per £100,000 of mortgage will be far from welcome amid the other huge price rises we’re seeing in energy bills and fuel.”


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