How interest rate affects mortgage
The Bank of England interest rate has again risen from 1% to 1.25%, learn how interest rate affects mortgage prices below.
Interest rates rise in order to bring down inflation, post covid the cost of living has risen drastically. The Bank of England try to manage this by raising interest rates, we have seen five consecutive increases since December 2021 but inflation is still set to continue rising this year.
The rising base rate means millions of homeowners will see their mortgage rate go up. If you have a variable or tracker mortgage you will notice this in increase repayments, if you have a fixed mortgage you wont notice a difference until your fixed term comes to an end.
What is inflation?
Inflation is the amount goods and services have increased, for example if inflation is 1% that means if the cost of milk one year ago was £1 it would be £1.01 today. The Bank of England have a target to keep inflation at 2%.
Why is inflation rising quickly?
Several factors affect inflation;
- Demand outweighs supply of products meaning increased prices
- Higher prices of importated of goods
- Increased fuel costs
- More job vacancies than employees meaning salaries are increasing and in turn businesses charging more for their goods and services
Why does increasing the interest rate affect inflation?
A higher interest rate makes it more expensive to borrow and more attractive to save which in turn reduces spending.
Thanks for reading, Rosa.
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