Last week, the Bank of England decided to keep Bank Rate at 3.75%.
Yet mortgage rates have been rising again.
So why are mortgage rates rising if Bank Rate hasn’t changed?
First, what is Bank Rate?
Think of Bank Rate as the anchor for interest rates in the UK. It influences how much it costs to borrow and how much you can earn on your savings.
Other countries have their own versions. In the US, the Federal Reserve sets a target for the federal funds rate, while the European Central Bank sets key rates for the euro area.
Interestingly, while the Bank of England kept Bank Rate at 3.75%, both the Fed and ECB raised rates by 0.25 percentage points this month, on the back of renewed inflation pressures.
But here’s the important part for your mortgage:
The Bank Rate influences mortgage rates, but it doesn’t determine them on its own.
Why inflation matters
Energy prices have risen sharply following the conflict in the Middle East.
We feel that directly at the petrol station and through our energy bills. But it doesn’t stop there.
Higher energy prices increase the cost of producing and transporting the things we buy. Businesses then have to absorb those costs or pass some of them on to us.
That makes inflation harder to bring down.
UK inflation reached 3.1% in August, and the Bank of England expects it to rise further over the coming quarters.
If inflation remains high, there is less room to bring interest rates down.
What do bonds have to do with your mortgage?
When the UK Government needs to borrow money, one way it does this is by issuing bonds called gilts.
Think of a gilt as an IOU.
Investors lend the Government money. The Government pays them interest and promises to repay the money at an agreed date.
The return investors demand is called the yield.
The Government borrows over different lengths of time, and those yields form what is called the yield curve.
Why does this matter?
Because bond yields change as expectations about inflation and interest rates change.
Those same expectations also influence swap rates, which are important for fixed-rate mortgages.
The mechanics of swaps can get complicated, but the principle doesn’t need to be.
Banks need to know what it will cost them to offer you a fixed mortgage rate, whether that’s for two, five or another number of years.
If markets expect inflation or interest rates to stay higher for longer, borrowing costs can rise, pushing fixed mortgage rates higher before Bank Rate changes.
The reverse can happen when markets expect rates to fall.
Markets price the future, not just what’s happening today.
And that’s what we’re seeing now
Bank of England data shows the quoted two-year fixed mortgage rate at 75% LTV rose from around 3.97% in February to 4.92% in August, despite Bank Rate remaining at 3.75%.
And the impact can be significant.
Someone refinancing a ÂŁ450,000 mortgage over 20 years would pay roughly ÂŁ2,720 a month at 3.97% versus ÂŁ2,940 at 4.92%.
That’s around £220 more a month, or over £5,000 across two years.
Money that might otherwise have gone towards saving, investing or simply enjoying life.
What can you do?
You can’t control inflation or financial markets. But you can prepare for their impact.
Know when your fixed deal ends. If you’re due to remortgage within the next six months, start looking at your options early.
Stress-test your mortgage. Work out what an extra ÂŁ50, ÂŁ100 or ÂŁ200 a month would mean for your budget.
Build some breathing room. If you have time before refinancing, consider whether you can strengthen your cash buffer or create more room in your monthly spending.
And the bigger lesson goes beyond mortgages:
What happens in the wider economy can directly affect your money.
Events that feel far removed from everyday life can eventually affect your mortgage, bills, spending power and how much you have left to save or invest.
Follow the money, and the connection often becomes much clearer.
