The UK unemployment rate has fallen drastically to 7.1%, according to the Office of National Statistics (ONS), and it is now close to the point at which the Bank of England will seriously consider raising interest rates.
The Bank has held interest rates at 0.5% for almost five years, seeing out the worst years of the credit crunch. In August, new chief Mark Carney reassured the markets through his preferred ‘forward guidance’ policy that rates were unlikely to rise until unemployment had fallen to 7% - a level not expected until 2016.
But now that the jobless rate has already fallen to within a whisker of that target, the Bank of England is back under pressure to signify when it might consider raising interest rates again, which will have a knock-on effect for mortgage payments.
Are interest rates about to go up?
It is inevitable that interest rates will rise as the recovery continues and the economy strengthens. Exactly when this will happen is unclear. But the Bank of England may reconsider its earlier position to investigate a rate rise when unemployment reaches 7%.
Inflation has recently fallen to its target rate of 2%, offering plenty of room to manoeuvre, while wage inflation also remains subdued.
And despite a larger-than-expected fall in unemployment, the minutes of the Bank’s latest Monetary Policy Committee meeting in January suggested there would be “no immediate need to raise the Bank rate even if the 7% unemployment threshold were to be reached in the near future”.
What the steep drop in unemployment does suggest is that one of the factors that will determine an interest rise is moving much faster than anticipated.
The Bank will be expected to acknowledge this and explain how its ‘forward guidance’ policy matches up to new developments. And with luck, it may decide to set further goals to give the markets, banks and consumers additional time to prepare for a rise in rates.
How does this uncertainty impact upon mortgages?
Those who are currently sitting pretty on a fixed-rate mortgage deal might well be feeling pleased with themselves right now, since their rates are fixed for the duration of the term.
Homeowners with a variable rate or ‘tracker’ mortgage will feel most at risk from the uncertainty regarding future interest rate rises. Any increase in the Bank of England base rate will be passed on to these mortgage customers, resulting in higher costs.
On a £200,000 mortgage, a rise from 4.00% to 4.25% would result in an increase of around £28 per month, or £336 per year. A rise to 4.50% would result in an increase of around £56 per month, or £672 per year.
Those who are considering buying a property or remortgaging their home might also be starting to get jittery, as banks and building societies begin to tighten their offers on fixed-rate deals.
Already, five-year fixes are being withdrawn as banks anticipate the growing probability that interest rate will be rising over the forthcoming years.
It is also worth noting that the support from the Funding for Lending Scheme, which has contributed towards lower lending rates in the last 18 months, has been withdrawn at the start of this year.
Therefore, it looks increasingly unlikely that rates will remain rock bottom for much longer, regardless of the Bank of England’s plans for the immediate future.
New buyers and existing homeowners will have to act quickly to secure the best rates – with only fixed-rate deals guaranteeing security against the impact of any interest rate rises over the next year or so.