Rising interest rates – everything you need to know

In June, the Bank of England voted to raise interest rates by 0.25% to 1.25% – representing a fifth consecutive rise and pushing them to the highest level since 2009.

The move has been driven by inflation which is currently at a 40-year high of 9% following significant rises to the cost of living prompted by record fuel and energy prices.

The current 1.25% figure remains low historically. In 1979, interest rates were raised to 17% and gradually dropped to 5.75% before the 2007 economic crisis.

But what do the current figures – and the prospect of further interest rate rises – mean for your finances and your ability to borrow?

Understanding interest rates

When interest rates rise, borrowing becomes more expensive.

Let’s use a basic example to demonstrate how significant interest rate rises can impact your outgoings.

A family that has recently moved to Oxfordshire has purchased a home for £1,000,000 using a £100,000 deposit. Their mortgage term is 25 years on the current standard variable mortgage rate of 3%.

This would mean their monthly mortgage repayment would come to £4,267.90.

Should their variable rate rise from 3% to 3.5%, their monthly repayment would change to £4,505.61 – an increase of £237.71.

It’s now easy to understand why it is essential every prospective buyer understands how rising interest rates can affect their ability to pay.

Mortgages – fixed rate vs variable

According to the English Housing Survey, just under a third of UK households have a mortgage.

Out of those homes, 75% have a fixed mortgage. The remainder are on tracker or variable rate mortgages.

Fixed-rate mortgage repayments do not change until the existing agreement – typically two or five years in length – ends. Tracker and variable rate mortgage are more complex and can change at the lender’s discretion.

Recent rises to interest rates have prompted the average two-year fixed-rate mortgage to rise from 2.59% to 3.25% in the past year. Using a trusted mortgage broker unlocks access to bespoke mortgages where in most cases you’ll recoup fees you’ve paid with savings made on your new rate.

Will interest rates rise again?

Many financial experts are forecasting further rises to interest rates in the next year – with some suggesting rates could be as high as 3.5% by June 2023.

Others predict interest rates will peak at 1.75%.

It all sounds rather doom and gloom, but the property market is constantly evolving and rising interest rates can prompt fantastic buying opportunities, particularly with expert support and advice. Here’s why:

  • Rising rates make homes more expensive for buyers, reducing demand
  • A reduction in demand can prompt sellers to reduce asking prices to attract buyers
  • A growing economy, supported by wage growth, has little impact on house prices

READ MORE: History tells us interest rates will go up

Our conclusion

Despite recent rises, interest rates remain historically low which is great news for individuals and families considering buying in Oxfordshire.

Since the Bank of England was founded in 1694, its Bank Rate has been 2.5% or lower for only a sixth of the time it has existed. And today’s market reflects some of the lowest levels of debt a homeowner can attain in the long-term.

Finding the right mortgage and buying property at the right price often comes down to receiving quality advice from experts in their field.

At Oxford Property Consulting, we provide you with the knowledge, confidence and security of making a smart financial decision through our friendly team and trusted partners.

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