Bank of England Holds Rates at 5.25% in September: What's Next for Borrowers? - Fraser & Co Estate Agents

Bank of England Holds Rates at 5.25% in September: What's Next for Borrowers? - Fraser & Co Estate Agents

Bank of England Holds Rates at 5.25% in September: What's Next for Borrowers?

In a noteworthy decision, the Bank of England opted to maintain its interest rates at 5.25% in September. This pause follows an astonishing 14 consecutive rate hikes since December 2021 when the Bank rate was a mere 0.1%. While this may bring temporary relief, it's essential to understand the broader implications and what's on the horizon for borrowers.

Inflation: A Mixed Picture

The decision to hold rates comes in the wake of mixed inflation news. The Office for National Statistics reported a slight dip in inflation in August, dropping to 6.7% from 6.8% in July and 7.9% in June. However, the September data indicated that inflation remained unchanged at 6.7%, raising concerns about the potential need for further rate hikes.

Is This the Peak of Rate Hikes?

Borrowers, particularly those seeking new mortgage deals, are closely watching the Bank of England's next move. They hope that this decision signals the culmination of a turbulent and painful campaign of interest rate increases.

Mortgage costs initially surged about a year ago after a mini-Budget by former Prime Minister Liz Truss created market uncertainty and sent the pound plummeting to historic lows. Lenders reacted by swiftly withdrawing deals and reintroducing them at significantly higher prices.

While mortgage costs eventually corrected, the spring of 2023 witnessed several lenders increasing their deal prices once again as the Bank rate continued its relentless climb in response to rising inflation.

Now, as inflation cools, the cost of fixed-rate mortgages is gradually decreasing from its peak.

Average Cost of Popular Mortgage Deals

According to Better.co.uk, our trusted mortgage partner, the average cost of a two-year fixed-rate deal across all borrower types is 5.75%. Three-year deals average 5.82%, and the average five-year fixed rate is 5.28%.

For those interested in a two-year tracker rate mortgage, the average rate is 5.76%, with the best deal priced at 5.39%.

Meanwhile, a lender's typical standard variable rate (SVR) is 7.92%, a significant increase from around 4.78% in July of the previous year.

As of October 1st, there were 5,495 residential mortgage deals available, as per data from Moneyfacts. This figure represents a gradual increase, as lenders reintroduce deals into a stabilizing market.

Interest Rates and Mortgages

The Bank rate has a direct impact on mortgage costs. Approximately 1.4 million homeowners on variable rate deals, including base rate trackers, have seen their monthly repayments increase following each Bank rate hike. For example, an average tracker rate rising from 6% to 6.25% would add an extra £30 a month to a £200,000 loan taken over 25 years.

Borrowers on fixed-rate deals, which lock in interest rates for a set period, are shielded from immediate rate changes. However, as their deals expire (around 800,000 mortgage holders in 2023 and 1.6 million in 2024), new deals will likely be more expensive.

House Prices and Stamp Duty

The latest house price indices have reported the steepest falls in the value of UK property in over a decade. Halifax's report from October 6th showed a 4.7% year-on-year drop in average house prices in September, the largest decline since 2009. Nevertheless, the pace of monthly declines has slowed, hinting at a potential stabilization.

Nationwide's report, published on October 2nd, revealed a 5.3% decline in average prices over the 12 months to September. On a monthly basis, prices remained flat.

Stamp Duty cuts, introduced in the 2022 mini-Budget, have increased the nil-rate band on property purchases from £125,000 to £250,000.

Why Are Interest Rates Rising?

The Bank of England's Monetary Policy Committee (MPC) has been raising interest rates to curb the economy and control rising inflation. The Consumer Prices Index (CPI) inflation rate stood at 6.7% in the 12 months to September, down from its peak of 11.1% in October 2022.

However, it's important to remember that the government's inflation target for the Bank of England is 2%. Despite the current downward trend, Governor Andrew Bailey emphasized the need for vigilance, stating, "There is no room for complacency. We need to be sure inflation returns to normal and we continue to take the decisions necessary to do just that."

One of the main drivers of inflation has been the rising cost of energy. While this cost is starting to come down, it remains significantly higher than in previous years, impacting household budgets.