Interest rates are much more expensive for borrowers than they were two years ago, and unfortunately the cost of borrowing is going to get more expensive. The Bank of England’s Monetary Policy Committee (MPC) is fighting inflation by raising interest rates. In simple terms, if it costs more to borrow money, people will spend less, demand will drop, supply will grow, and prices will reflect the drop in demand. It will help the economy overall, but meanwhile those that must borrow are put in a tough position while the MPC is working on inflation.

The latest report on inflation was released today by the Office for National Statistics (ONS) showing the efforts of the Bank of England’s Monetary Policy Committee (MPC) is paying off. Inflation fell to 6.8% in July, which was in line with the forecast given and this could bring about some good news for borrowers. Reaching the forecasted level for inflation could take some pressure off the MPC and should amount to the next rate hike only being 0.25% in September, while had it stayed above forecast, a larger rate increase could have occurred such as the 0.50% voted on in June. 

The last meeting of the Bank of England’s Monetary Policy Committee (MPC) resulted in the fourteenth consecutive gathering in which an increase to the standard base interest rate occurred. The next meeting in September is likely to push the base rate even higher. While inflation has responded to the MPC’s rate hikes by dropping to 7.9% in June and is forecasted to fall to 6.8% in the next report, but it will still be three times the target rate of 2.0%. The increase to the rate is expected to be another 0.25% as in August which will take the rate to 5.50%.

Inflation is falling but will be with us until 2025, interest rates are rising and will continue to do so till inflation is near target, but perhaps the newest threat to household budgets is that house prices could begin to decline and pull the one opportunity to save money from the grasp of homeowners. As the housing market experiences a lack of demand and house prices begin to drop, so do the values of properties. Despite a homeowner residing in their home and paying their monthly repayments, the value of the home matters, even if there is no intent in the near future to sell the property.

Last week the Bank of England increased the standard base interest rate by another 0.25% to carry the rate to a new high for the past 15 years at 5.25%. This has brought on more concern for homeowners coming to the end of their mortgage term or those that have already had theirs expire and have been moved to their lender’s standard variable rate (SVR) having forgone a remortgage choice. For those nearing the end of their term, those not on a fixed rate, and especially those on a SVR there are savings to be found with a remortgage.

The average house price fell for the fourth consecutive month in July according to Halifax. More expensive borrowing costs are being blamed for the decline in demand from home buyers. First time buyers are considering homes much smaller than two years ago when lender’s interest rates were at historically low levels. In some cases, they are putting their homeownership dreams on the shelf. The average house price dropped annually by 2.4%, and while that could have made property buying more affordable, any savings were erased by higher interest rates in mortgage offerings.