Mortgages
Another base rate hike adds £30 a month to 1.4 million mortgage bills
The Bank of England has raised the base rate for the twelfth consecutive time to stand at 4.5%, heaping an average £30 a month to more than 1.4 million homeowner mortgage bills.
The Bank’s Monetary Policy Committee (MPC) voted by a 7-2 majority to raise interest rates by 0.25 percentage points from 4.25% to 4.5% as it tries to curb inflation which climbed to 10.1% in the year to March.
Two members preferred to maintain bank rate at 4.25%. At its latest forecast, the Bank expects to raise the rate once more and hold at 4.75% until the end of the year. It also expects inflation will drop back to 5% by the end of 2023.
However, the latest rise means the figure stands at its highest level since October 2008 amid the financial crisis. It has also risen 12 times in a row from the historic low of 0.1% in December 2021.
This latest rise is likely to feed into higher mortgage costs for the hundreds of thousands of homeowners on variable rates, while for savers, the assumption is that it’s good news. But the rate hike was already largely priced in so a leap in these rates is unlikely to materialise.
For those with debt and credit cards, it could mean higher rates, making it more expensive to pay back any money borrowed.
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Full impact on variable rate mortgage holders
Anyone on a variable rate mortgage – an estimated 1.41 million borrowers at December 2022, according to UK Finance – can expect to see a near instant increase to monthly payments on tracker and Standard Variable Rate mortgages.
Calculations by TotallyMoney and Moneycomms revealed that based on the average UK property (£270,708) with 75% loan-to-value, monthly mortgage payments will increase by £26.
While this sum may seem small, given the 12 back-to-back rate hikes, it means these homeowners will be forking out an extra £482 each month compared to the low rate environment seen back in December 2021 before the continuous hikes.
Other calculations revealed that those with a £250,000 mortgage, will see a £30 a month rise, while those with a £400,000 mortgage will see around £50 a month lumped onto payments.
At the same time, household incomes are expected to have fallen by 10%, according to the City watchdog, the Financial Conduct Authority (FCA).
Those currently on a mortgage fix are protected from the rate hikes for the duration of their deal. But anyone coming off a fix in the coming months will be met with much higher rates when remortgaging.
According to the FCA, 5.2 million mortgages will have been exposed to changes in interest rates between July 2022 and June 2024.
The regulator also warned that an estimated 356,000 mortgage borrowers may face payment difficulties by mid-2024, with those coming off a fixed deal likely to fork out an extra £340 a month.
According to data from Moneyfactscompare, the average Standard Variable Rate mortgage stands at 7.37%, having risen from 7.3% just last month and from 4.78% this time last year.
Meanwhile, the average two-year fixed rate mortgage stands at 5.26%, five-year deals are at 4.97%, while 10-year mortgages are at an average 5%.
What does this mean for savings?
While higher savings rates are unlikely off the back of today’s rise, Sarah Coles, head of personal finance at Hargreaves Lansdown, said there are some “highly competitive deals” so savers are urged to compare to make sure they’re getting the best deal.
“The average easy access account has continued to tick gradually upwards, and is now 2.1% – compared to 1.8% in mid-February. The average one-year fix has risen too, and is now 4.06% – up from 3.58% in February. Isbank was briefly offering fixed rates at 5%, and while the best on the market is now paying 4.95%, it’s still one of the best deals we’ve seen in years. In the one-year fixed market, we haven’t seen these kinds of offers for well over a decade,” she said.
Coles added: “It means that anyone who hasn’t switched for a while, and is sitting on a rock bottom rate from a high street giant, needs to vote with their feet, and find a more rewarding home for their money.
“If you’ve been waiting for the right time to switch or fix, it can be tempting to hold off when the Bank of England hikes rates, in the hope they go higher, but this could be a mistake. The jury is still out as to whether this is the last of the rises, or whether there could be one more in the tank. However, it looks distinctly like we’re coming to the end of this particular cycle.”
What does this mean for those with debt?
Another interest rate rise means the cost of borrowing has gone up again – “straining budgets already at breaking point as more of people’s disposable income gets eroded by interest payments on loans, mortgages, credit cards and overdrafts”, Alice Haine, personal finance Analyst at Bestinvest, said.
It comes as people are increasingly turning to credit to fund their living costs, according to the Bank of England’s latest Money & Credit data, with net borrowing jumping to £1.6bn in March compared to £1.5bn in February as the cost-of-living crunch rumbles on.
“Almost a quarter of adults in Britain reported borrowing more money or using more credit in the last month compared with a year ago, according to the ONS, with 63% spending less on non-essentials as worries about paying for food and household bills mount,” Haine said.
She explained that borrowers with existing agreements in place, such as a personal loan or car finance, will not see their repayments go up as the terms of their agreement are already locked in, but anyone shopping around for new finance may find the products on offer more expensive.
However, those with outstanding credit card debt may see their repayments increase if they have a card that tracks the BoE base rate.
“Some do and some don’t, so read the terms and conditions to see if your card does, though your lender should notify you in writing if it plans to increase the rate it applies to your card”, she said.
Haines added that it’s only the standard interest rate that is affected, so those on a 0% balance transfer card, or any other promotional rate, will be unaffected until their deal expires.