The Monetary Policy Committee (MPC) has voted to increase the Bank of England base rate from 3.75% to 4%, marking the first interest rate rise in three years.
While a further hold at 3.75% would have been welcome for borrowers, growing inflationary pressures meant an increase was becoming increasingly likely.
Eight members of the MPC voted for a quarter-point increase, with the ninth favouring a larger half-point rise to 4.25%. With further increases possible at the December meeting or early next year, borrowers should review their circumstances and consider taking action sooner rather than later.
Although inflation rose to 3.5% in the 12 months to September, there remains limited evidence of wider inflationary effects feeding through into wages and prices. Higher mortgage rates have already placed additional pressure on household finances, reducing disposable income and spending, which in turn can help ease inflationary pressures.
Current fixed-rate mortgage pricing already reflects market expectations of further increases in base rate. Should financial markets begin to view interest rates as approaching their peak, swap rates, which underpin the pricing of fixed-rate mortgages, could ease, with mortgage rates potentially following.
Some borrowers are considering base-rate tracker mortgages rather than fixed-rate products, as trackers are currently priced lower in some cases, at least initially. However, this approach is not suitable for everyone. Borrowers need to be comfortable with the possibility of further rate increases and ensure they could continue to afford their mortgage payments if rates rise.
Although average mortgage rates have reached their highest levels in three years, several major lenders, including Barclays, Halifax and Nationwide, have recently reduced their pricing, meaning more competitive deals may still be available.
Commenting on the decision, David Wise, Founder of Fitch & Fitch, said:
“While a rise in base rate is disappointing for borrowers, much of the pressure on fixed mortgage pricing has already been reflected in the market. We have also seen some lenders reducing their rates last week, despite the announcement.
“For those approaching a remortgage or planning a property purchase, my advice remains to plan ahead. Securing a mortgage rate several months in advance provides some certainty, while allowing the opportunity to review the options before completion should more competitive rates become available.”
Those looking to purchase a property or remortgage in the coming months should seek advice from an independent, whole-of-market mortgage broker such as Fitch & Fitch. Many lenders allow mortgage rates to be secured several months before they are required, with the opportunity to review pricing before completion should more competitive products become available.