Base rate and the mini-Budget: How did the mortgage market react?

Last updated: 30 January 2023

The Bank of England’s base rate currently stands at 3.5%, the highest it has been at the beginning of a year since 2008. But this rate may increase further on Thursday, when the Bank of England's Monetary Policy Committee meets for the first time this year. 

Whatever the outcome on Thursday, it is a figure which comes in stark contrast to the 0.25% recorded at beginning of 2022, albeit when the UK was in a different economic environment. 

Since 2022’s New Year’s Day the base rate rose a further eight times as it played catch-up to soaring inflation.

One of the effects of a rising base rate is that borrowing becomes more expensive. For consumers, this can be seen in rising mortgages costs.

Using data unique to Moneyfacts, we’ve tracked how mortgage rates have changed since 16 December 2021, the day of the first of nine successive base rate increases.

On 16 December 2021 the Bank of England voted to increase the base rate for the first time in over four years, from 0.10% to 0.25%.

It was a move which not only increased tracker rates, but various fixed rates too, according to the Moneyfacts UK Mortgage Trends Treasury Report that was published in January 2022.

“The impact of the Bank of England base rate rise in December 2021 can start to be seen in the rate increases which have been passed on to term and two-year tracker average rates, which went up by 0.15% and 0.17% respectively month-on-month,” wrote Eleanor Williams, Finance Expert at Moneyfacts at the time. 

However, the average Standard Variable Rate (SVR) saw a marginal 0.01% increase in the same period to 4.41%.

It meant that if you borrowed £200,000 on a repayment basis over 25 years at this rate it would cost you £1,101 a month.

As of this January the average SVR rate stands at 6.64%. So, according to the same calculations, taking out a mortgage at this rate would cost you £266 extra per month when compared to last January’s average SVR rate.

Besides the Bank of England base rate, former Chancellor Kwasi Kwarteng’s mini-Budget speech at the end of September had a significant impact on the mortgage market.

As covered by Moneyfacts, its resulting uncertainty forced multiple lenders to remove and reprice their fixed rate mortgages from the market. Within a matter of days, the price of fixed rate deals soared.

According to Moneyfacts data, on the day of the mini-Budget, the average two and five year fixed rates stood at 4.74% and 4.75% respectively. By the following Friday the average two year rate rose to 5.17% and the average five year rate increased to 5.1%.

So if you had taken out a £200,000 mortgage over a 25 year period at 4.74% your monthly payments would be £1,139.08.

If you had waited a week before locking into the average rate two year your monthly repayments would have increased by £50 per month.

In the aftermath of the mini-Budget average two and five year fixed rates continued to rise and peaked on 20 October, the day Liz Truss resigned as Prime Minister. While these rates have somewhat subsided since then, it could prove worrying for those who need to remortgage.

Research published by the Office for National Statistics earlier this month found that 1.4 million people are set to face interest rate rises this year when their fixed rate mortgage deals come to an end.

“ONS calculations show that in the first quarter of this year alone, over 350,000 fixed rate mortgages will have to be renewed,” said Karen Noye, Mortgage Expert at Quilter, an investment company.

Many of these borrowers locked into their mortgage when interest rates were below 2%. To illustrate their typical monthly costs, a £200,000 mortgage over a 25 year period at 2% would cost £848 per month.

As of the start of 2023, the average two year fixed mortgage stood at 5.79% while the average five year fixed rate is 5.63%.

If that same borrower were to borrow £200,000 over 25 years and lock into January’s average five-year fixed rate then the monthly repayments would cost £396 more per month.