Will interest rates rise in Q4 2021? Most experts seem to think so. They predict that an interest rate rise is due before Christmas. If, like me, you have a big mortgage, then it could be the worst Christmas present ever!
Here, I take a look at why experts think there might be an interest rate rise before Christmas, how much interest rates could rise and what you can do to protect your finances.[top_pitch]
Why will interest rates rise?
Interest rates are currently at an all-time low. The Bank of England base rate stands at 0.1% – that’s the lowest rate in UK history. In March 2020 the Bank of England interest rate was 0.25%, but the bank decided to reduce it even further to 0.1% due to the Covid-19 crisis.
Low borrowing rates have helped businesses and consumers cope with challenging economic times during the past 18 months. But now inflation is picking up and gas prices and fuel costs are rising. Food costs are also increasing rapidly.
Economists believe that there is a link between interest rates and inflation. In the past, the Bank of England often chose to raise interest rates to control inflation. It looks increasingly likely that they might raise interest rates again for the same reason.
How much will interest rates rise?
Many experts believe that the Bank of England will raise interest rates by 0.15% before Christmas. They also predict a 0.25% interest rate rise in February 2022 and another 0.25% interest rate rise in August 2022.
That will push the Bank of England base interest rate up to 0.75% in total, a rise of 0.65% from its current rate of 0.1%.[middle_pitch]
How does an interest rate rise affect your mortgage?
If your mortgage is a tracker mortgage or a discount mortgage, then the amount of interest you pay is linked to the base rate. You won’t be offered a rate as low as the base rate, but it will often be 1%-2% higher than the base rate. This means that you will be directly affected if interest rates go up.
If you have a fixed-rate mortgage, then you won’t pay any extra interest during your deal period. However, you can expect to pay more when your mortgage deal comes to an end.
If you have a flexible rate mortgage of £100,000 then the interest rate rise of 0.65% would mean your interest payments could increase by £650 per year. That’s a lot of extra money to find on top of paying for rising food, gas and fuel bills.
What can you do?
If your mortgage term is coming to an end, then it may make sense to remortgage onto a fixed-rate deal. Then you can lock in your mortgage interest rate for at least two years. There are still lots of good mortgage deals around with attractive interest rates, especially if you have managed to save a healthy deposit.
If you are facing higher interest costs and are worried you can’t afford them, then here are a few tips:
Make a detailed budget to understand how you are spending your money and where you might be able to make savings.
Look at your bills to see if you could save money, for example by switching broadband providers.
Consider transferring any credit card balances to a zero % credit card.
Speak to your mortgage company if you are struggling to pay the mortgage. They may allow you to pay interest only for a short period.
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