What's going on?
On Thursday 22 September 2022, the Bank of England ("BoE") announced a 0.5% increase to the base lending rate, taking the rate to 2.25%. Roughly speaking, a half percent increase equates to an extra £25 each month per £100,000 of mortgage for those on standard variable rates ("SVR") or trackers (but it can be more).
In the space of just over 12 months, tracker and SVR customers are now paying around £216 a month more on average. Many banks and lenders have also increased overdraft and consumer credit rates with every change in the BoE base rate.
From February 2009 to August 2016 the base rate had flat lined at 0.5%, before being lowered to 0.25%. From the onset of the Covid-19 pandemic in March 2022, the base was lowered to 0.1% and remained so until December 2021 - since then we have had seven increases taking us to 2.25%.
The BoE has increased the base rate as part of its monetary policy to try and lower inflation - which was 10.1% in July before falling to 9.8% in August 2022.
The cautious approach of the BoE has been to try and put a "brake" on spending. This approach was thrown into turmoil with the Chancellor's budget on Friday 23 September 2022 which announced measures which appeared to be at odds with the BoE's attempts to slow spending and were viewed to be an "accelerator" on spending.
What might happen next?
The Chancellor's budget has resulted in adverse money market responses across the world with the pound being devalued and UK government borrowing (gilts and bonds) becoming more expensive for the public purse.
Many, financial analysts are predicting significant increases to the base interest rate. Deutsche Bank experts called on the BoE to make an emergency rate hike "to regain credibility with the market". Bloomberg analysts predict the base rate soaring to 5.2% by August 2023 while others suggest the rate could rise to 6% next year. The last time the UK base rate hit 5% was 16 years ago, back in November 2006 - and at that time wages were worth relatively much more and most households had less personal debt.
As at 28 September 2022, there are no plans for a further BoE rate rise until 3 November 2022 - although that may change. The Governor of the BoE has said the bank "will not hesitate" to raise interest rates to meet its target of lowering inflation to 2%.
What can I do now?
Most people in Scotland with mortgages are on a fixed rate deal - typically an agreed rate for two to five years - and BoE base rate changes will only affect them when their deal comes to an end. It's estimated there are as many as 2 million UK households with fixed rate deals coming to an end in the coming months - that gives a figure of around 160,000 households in Scotland.
Most lenders will allow their customers to take out a new fixed rate deal three to six months before their current deal is due to end. With the likelihood of the base rate rising in November and early next year you should check if you have the option to secure a new fixed rate deal now. While any new deal will be more costly than what you currently pay, it is likely to be the best possible option. You should consult with an Independent Financial Adviser (IFA) to assess which mortgage & borrowing products are best suited to your current financial circumstances.
In response to the volatility in the value of the pound and the Chancellor's plans for further tax cuts in November, many High Street banks are not offering new fixed rate deals for new customers. Accordingly, switching to a new lender for a fixed rate deal might not be an easy option at present.
For those on SVRs and trackers you can check whether your current lender or other lenders are offering a cheaper deal. MoneySavingExpert has a detailed guide on how you can do this here.
If you live in Scotland, have financial difficulties with your existing mortgage provider and need help, you can speak confidentially to one of our qualified money advisers using our online chat function.