What does an interest rate rise mean? Five things you need to know

  • The Bank of England voted to raise rates to 0.5%, up from 0.25%, but this is not the start of a run. Only two more 0.25% increases in rates are expected over the next two years, which would bring the rate to just 1%.
  • This rise in rates will make little difference to the housing market: two thirds of all mortgages are on a fixed rate and will face no change in mortgage payments. And, many coming to the end of a deal will be able to remortgage onto rates lower than they had been paying.
  • For new borrowers, the existing affordability criteria mean that they already have to satisfy lenders that they can tolerate a rise in mortgage rates to c7%, significantly beyond the current offered rate, even if the whole 25bp rise is passed on. This small rise won’t lead to a big fall in the numbers failing affordability tests
  • The Bank expects inflation to rise a bit more, but will not be keen to raise rates in the short term because inflation will recede as the effect of the fall in the currency drops out of the annual calculation.
  • Looking ahead the Bank forecast wages beginning to rise from the spring of 2018, helping to improve the standard of living of households.
  • That will help to boost economic and housing market sentiment. While this is unlikely to cause the rate of activity to increase sharply, it will help to set the foundations for the market to gradually begin to return to normality.