Are mortgage rates going up? Why UK mortgages could get more expensive if interest rate increases next year

With the cost of living increasing, households across the UK could yet be dealt another financial blow if mortgage rates were to rise.

The winding down of the government’s Covid support schemes has come at a time of soaring wholesale gas prices and fuel shortages at the pump.

National insurance payments are set to rise in 2022 to help the NHS recover from the pandemic and fund social care reform in England, while inflation has also increased.

Now homeowners could be hit with higher monthly mortgage payments if the Bank of England puts interest rates up to curb the rate of inflation, which is currently above the BOE target.

Are mortgages getting more expensive?

Following the end of the stamp duty holiday in England and Northern Ireland, questions remain around the future of the housing market.

Will house prices go down? Why have they risen so much over the past 18 months? What impact might the end of the stamp duty holiday have on prices?

Well, it appears there is another question on homeowners’ lips - are mortgages getting more expensive and why might mortgages be getting more expensive?

It comes after the BOE chief opened the door to an increase in the interest base rate, currently 0.1% due to the Covid pandemic, to keep a lid on rising inflation.

If the base rate increases, with some experts suggesting it will in 2022, then the cost of borrowing will increase, a cost which will be passed on to those borrowing.

It means that tracker mortgages offering low interest rates will be susceptible to any change to the base rate while anyone remortgaging on a fixed term deal might be offered higher interest rates than they initially thought.

Are interest rates going to rise?

When interest rates are low, borrowing money is cheaper.

This encourages people and companies to spend and borrow more money on big purchases, such as a new home or new premises.

Yet an increase in borrowing leads to an increase in the rate of inflation, due to market forces, meaning the purchase power of your money is weakening.

Inflation falls when the interest rate rises.

The rate of inflation, currently 3.2%, is rising and expected to reach 5% before the end of the year, which is way above the BOE’s 2% target.

Because of this, the interest rate is being carefully monitored but the BOE’s monetary policy committee has voted unanimously to keep the base rate at 0.1%.

BOE governor Andrew Bailey said: “Recent evidence appears to have strengthened that case [for an increase in interest rates] but there remain substantial uncertainties and we are monitoring the situation closely.”

Why do interest rates impact the housing market?

If there is a rise to the base rate then this can increase mortgage repayments, and increase the overall size of the loan taken out to secure your home.

As interest rates are currently low, it could be an opportunity to assess if it’s worth remortgaging now and moving on to a longer term fixed mortgage rate.

If you’re looking at what to do then consulting a mortgage broker or a financial adviser could be a good idea, alongside using an online mortgage calculator.

Interest rates can also have an impact on house prices, with a rise in the base rate reducing the price of houses - yet with demand outstripping supply the current market is thought to be strong enough to weather any changes.

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