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How your mortgage rates are calculated

Chief executive of Worldwide Financial Planning, Peter McGahan decodes headlines from the Bank of England

Peter McGahan, chief executive of Worldwide Financial Planning(Image: © Richard Trainor)

More than 1.4 million people in the º£½ÇÊÓÆµ will have had the joy of coming out of the security of a fixed rate mortgage into a tornado of hiked variable rates, often wondering if the weather was going to get worse. It is very stressful indeed. I get it.

Here is some more guidance.

We covered this at the beginning of the rate rises, and alerted borrowers not to panic into fixing with longer, higher rates. Hopefully you didn’t.

They are still falling despite the ‘news’.

The role of a central bank is to keep an economy in check. One of their biggest risks is wage inflation. That can cripple economies, as businesses who are struggling with inflation themselves are being asked for wage rises as their staff struggle with hiked costs. Pay awards were running at over three times the central bank’s target, almost unheard of.

And this is how they deal with that.

Headlines from the Bank of England (BOE) will be gloomy – for example - ‘Britons warned to expect high rates for longer as Bank presents gloomy º£½ÇÊÓÆµ outlook’. Last year we were told to expect the worst recession. Try googling ‘expect the worst recession’. Fill your boots listening to the doom-mongers, but before you judge the journalist, it’s the message that was being sent out from the Bank of England trying to slow the economy – and a well-known market maker trying to make money out of it.

It’s a game with the Bank of England and market makers (I’ll explain), but this can mean you make a big call on your family home based on communication aimed at the market makers of rates that you just wouldn’t be expected to grasp. ‘Prepare for a long an ugly recession’ was one headline. And so, cat and mouse games ensue, with market makers keen to do business on the mortgage market trying to second call the Bank of England.