Days Away from Possible UK Bank Rate Equal to Highest Level Since Financial Crisis

Days Away from Possible UK Bank Rate Equal to Highest Level Since Financial Crisis

In a few days, the Bank of England’s Monetary Policy Committee (MPC) will meet for the first time in 2023. After the last meeting in December 2022, January followed with a break. Thursday could mark the tenth consecutive meeting in which the committee votes to increase the standard base interest rate. The base rate had remained mostly steady throughout the peak of the pandemic until inflation began to grow and in December 2021 the almost zero all-time historic low rate of 0.1% was increased to 0.25%. 

After the last nine consecutive meetings, the increases have brought the base rate to 3.5% and with it additional strain on household budgets already dealing with inflation, higher energy costs, and a lack of job wage growth.

The MPC is facing a hard decision. It is important to gain control of inflation but there is also the risk that another rate hike could cause a slump in the economy. The expectation is for another 0.5% increase which would take the rate to 4.0%. This would be the highest standard base interest rate since the 2008 financial crisis.

This would mean there are generations of homeowners that have never faced an economy where their interest rate offers are based on the Bank’s standard rate of 4.0%. Many could be seeing it as an abnormally high rate and expect it to plunge back to the levels that became their normal. However, that is not likely to be the case.

The circumstances that led to the Bank setting an almost zero-base rate was a global pandemic. The all-time historic low rate was abnormal despite the years of extremely cheap borrowing.

Because so many homeowners began their homeownership during a time when rates were historically low, experts have warned for them to prepare for their repayments to increase by a substantial amount. This is especially true for those that are close to their term ending should they forego a remortgage and allow their lender to move them to their standard variable rate (SVR). Taking on the ease of moving to a SVR could have a homeowner paying more than necessary and being subject to further rate hikes.

A remortgage usually is attached to lower interest rates than a SVR. With a new deal, a homeowner could save money from a SVR and with a fixed rate remortgage they could avoid being impacted by further rate hikes.

There are two other scenarios that could impact homeowners ahead along with higher inflation, higher interest rates, and higher energy costs. There are warnings of a recession and there are more frequent announcements of large corporations cutting their work force. There is also the possibility of homeowners experiencing a loss of value in their properties as the housing market takes a hit.

If value losses reach double digits as some have forecasted, it could put homeowners into negative equity as their property value plunges below their level of debt. Being in negative equity would put a remortgage out of reach, and thus the ability to save money and avoid rate hikes. 

Lower property values would also change a homeowner’s loan to value (LTV) level. The lower the loan to the value of the property the better as lenders use LTV as a criteria to determine which homeowners are offered the better interest rate offers. Lower LTV involves less risk in lending for the lender and thus the homeowner is rewarded with lower interest rate offers.

All possible scenarios amount to the need for homeowners to prepare and shop for a remortgage sooner rather than later. 

Online shopping for a remortgage is easy and quick. In a matter of minutes, a homeowner could visit a remortgage lender website and have a quote in hand of a possible deal. Visiting more sites will offer quotes to compare. In a one-stop shopping experience, visiting the website of a remortgage broker puts many quotes from various lenders in hand to review and compare. Brokers also often have exclusive deals from lenders making shopping with them a smart strategy in looking for the best remortgage.

The woes of the economy in the coming year are worrying, but for homeowners a remortgage could be helpful in saving money, shielding a household budget, and offering some peace of mind.

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