The Bank of England has raised the bank rate for the 12th time in a row. How did we get here? Find out what you need to know about historical mortgage rates
In May 2023, the Bank of England (BoE) raised the bank rate by 25 bps to 4.50%, which was the 12th consecutive time and was in line with market expectations. Borrowing costs are now at new highs which we have not seen since 2008, with the UK’s central bank battling double-digit inflation.
On June 15, 2023, Nationwide Building Society and Atom Bank Plc announced increases in mortgage rates, joining a flurry of UK lenders who are hiking prices in response to inflation.
“With the continued upward trajectory of swap rates in recent times and lenders across the market increasing rates, we are having to make some increases across our fixed-rate mortgage range,” a spokesperson for Nationwide said, as reported by Bloomberg. “These changes are in line with the movement in swap rates and ensure that, as a building society, we can continue lending to all types of borrowers.”
But what have the historical rates been? How did we get here? And what is the central bank predicting in the future? In this article, we will answer these questions and more.
Here is everything you need to know about historical mortgage rates in the UK.
How does the bank rate affect the mortgage rate?
The BoE base rate is the rate of interest it can charge to other lenders when they borrow money. That means when the BoE’s interest rate is higher, it will cost lenders more to offer products, such as mortgages. The BoE base rate is therefore reflected in the mortgage rate.
What is the Bank of England predicting for 2023?
The UK’s central bank predicts that inflation will fall to 5.1% in the fourth quarter of 2023, compared to 3.9% predicted in the February forecast. A target of 2% is forecast for late 2024.
The UK economy was expected to stall in the first and second quarters of 2023, but then to increase 0.25%, which it did.
What have been the highest interest rates in the UK?
The highest interest rates in UK history were in 1979 when interest rates reached a whopping 17%. According to the BoE, the interest rate was at 5.5% in October 1977 before rising to 12.5% by the end of 1978. Throughout 1979, the interest rate rose gradually to 17%.
Margaret Thatcher’s Conservative government raised the interest rates at the time to combat inflation, which was rising. These economic conditions led to a recession in 1980 and 1981. During this period, unemployment rose sharply, and the manufacturing industries took a significant hit.
What is the lowest mortgage rate ever in the UK?
Over the past 25 years, the average mortgage interest rate was its lowest at 3.59% in September 2021. By contrast, the average mortgage interest rate peaked at 8.87% in September 1998.
Throughout the years, the mortgage interest rates have fluctuated in accordance with the BoE base rate.
Historical mortgage rates: the average
Between 1995 and 2022, the average mortgage interest rate in the United Kingdom was 5.62%.
While the disparity of the historical highs and lows of the mortgage interest rates have fluctuated wildly, most short-term changes do not impact mortgage borrowers since most are on a fixed-term mortgage. In fact, roughly 75% of mortgage borrowers in the UK are on a fixed-term mortgage. In 2019, for instance, more than 90% of new mortgage borrowers chose a fixed-term mortgage.
Fixed-rate mortgages
Because a fixed-rate mortgage is a home loan with an interest rate locked in for a certain period of time—usually two, four, or 10 years—the majority of people in the UK with fixed-rate mortgages do not see any change to their mortgage payments in the short term, regardless of what is happening with the BoE and interest rates overall.
Variable-rate mortgages
Homeowners in the UK who have variable-rate mortgages (an estimated 850,000), on the other hand, will be most vulnerable to changes in the interest rate. However, fluctuations in the market may not necessarily cost those homeowners a lot. UK Finance estimated that an increase in the bank rate of 0.15% will lead to an average increase in payments by about £15.45 per month.
What economic factors affect mortgage interest rates?
While your actual mortgage interest rate will result from various factors —such as the mortgage product you choose as well as your mortgage lender—the BoE’s base rate also has a significant effect on mortgage rates.
The BoE’s base rate does not, however, only affect mortgage rates; the central bank’s base rate also affects a wide range of financial products—as well as the British pound itself. The BoE reviews its base rate on the first Thursday of every month and could be changed depending on the rate of spending in the UK economy. If, for instance, spending is deemed to be too low, the BoE will decrease the base rate. Conversely, if spending is deemed to be too high, the central bank will increase the base rate.
As we have seen, there are multiple economic factors that impact your mortgage rate, among them the BoE’s base rate which is itself impacted by economic factors, including the UK’s current inflation.
While it is important to keep up with the changing economic and mortgage markets, it is equally important to understand how we got here by learning about the historical mortgage rates in the UK. That way, you will be able to make the most informed decision when it comes to getting a mortgage.
Before committing yourself to applying for a mortgage to buy a house in the UK, do your research such as checking in on what the best mortgage lenders in your area can do for you.
What do you think of historical mortgage rates in the UK? Do you have any experience navigating the fluctuating rates? Let us know in the comment section below.
