Posted 26th May 2023 by ctatax-admin
MILLIONS of homeowners will face higher mortgage repayments after the Bank of England hiked interest rates again.
The central bank’s base rate has increased from 4.25% to 4.5%.
The rate is used by high street banks and lenders to set the rates it offers customers on mortgages, loans and savings. This is the twelfth time in a row that the Bank of England (BoE) has raised rates since December 2021 when they were at historic lows.
Interest rates are already at a 15-year high and today’s increase means that the base rate is equivalent to levels last seen in October 2008. The move means a typical mortgage holder on the standard variable rate will see their bills go up by £35 a month, according to AJ Bell.
Households with a £250,000 mortgage have already been paying £612 more a month compared with November 2021 when rates were 0.1%, according to TotallyMoney.
However, the blow is even greater for the 1.3million households whose fixed mortgage deals expire this year. Those coming off the average 2.58% fixed rate available in 2021 will see their mortgage payments rise by £13,000 a year if they’ve taken out a £250,000 loan, according to AJ Bell.
The BoE wants to get inflation back down to its target of 2% by the end of the year, but it so far remains stubbornly high. Hiking its base rate is one way of doing this. Rising interest rates are meant to encourage households to save rather than spend, which forces inflation down.
Inflation is a measure of the price of everyday goods, so if it’s high it means everything from fuel to food is costing more. The rate of inflation dropped to 10.1% in April. Prices are still rising, but at a slower rate than the previous month.
It remains higher than experts predicted, and above the central bank’s target.
But it is good news for households as the Monetary Policy Committee (MPC), the group of BoE experts that sets the rate, now forecasts that inflation is expected to fall to around 7% by the middle of the summer.
It will fall to 5.2% by the end of this year and 3.4% by next summer. It’s expected to fall thanks to energy costs dropping, but food prices are still expected to remain higher for longer.
Alice Haine, personal finance Analyst at Bestinvest said: “With inflation stuck in double-digit territory since September last year and the economy proving more resilient than forecast, the Bank of England had little option but to use another base rate increase to bring down runaway price rises to more sustainable levels.
“Increasing interest rates is the main tool central banks use to lower inflation, as it leaves consumers with less disposable income to spend on goods and services, which in turn encourages price setters to keep prices low.”
But it’s also good news for the economy as the BoE believes that it will grow over the next couple of quarters.
This means that the country will now avoid a recession that was previously forecast in November 2022. Chancellor Jeremy Hunt said: “Although it is good news that the Bank of England is no longer forecasting recession, today’s interest rate rise will obviously be very disappointing for families with mortgages.
“But unless we tackle rising prices, the cost of living crisis will only carry on – which is why we need to be resolute in sticking to our plan to halve inflation by the end of the year.”
Here’s everything you need to know about what the rise to the base rate means for you and your money.
Your mortgage rates can go up if interest rates rise – but how much depends on the type of loan you have. The 1.4 million households on a tracker or variable rate (SVR) mortgage will see an increase in their costs. For someone with £250,000 of mortgage borrowing, a 0.25% rise means an extra £35 a month in costs, according to AJ Bell. At £400,000 of mortgage borrowing a 0.25% rise means an extra £56 a month or more than £672 a year.
Households on a fixed mortgage deal won’t see a payment increase straight away as they are locked into a rate for a set period.
But when these homeowners come to remortgage, they will face higher repayments as their fixed deals will have much higher rates than when they last locked in. Exactly how much more depends on the size of the mortgage, the rate you fixed at, the new rate and the loan-to-value when you remortgage.
Anyone coming off a fixed rate deal who hasn’t got a new mortgage sorted will end up falling on their lender’s standard variable rate (SVR).
MoneyFacts data shows that the average SVR has leapt over 7% and this means that someone coming off the average two-year fix from 2021 will see their rate rise from 2.58% to 7.3%.
On £400,000 of borrowing that represents a truly shocking increase of £21,480 a year in mortgage costs – almost £1,800 a month. Even at £250,000 of borrowing, it means a rise in costs of £1,067 a month – or almost £13,000 a year.
Sarah Coles, personal finance expert at Hargreaves Lansdown has explained whether these households should fix again.
She said: “If you fix now, you’re likely to see rates fall in the coming months, but you can’t be certain when they’ll fall, or how far.
“Meanwhile, you may well be on a higher variable rate while you wait, so you’ll pay a price.
“You might want to fix for two years on the basis that you’ll pay more for it now, but rates could be lower when you come to remortgage.
“Alternatively, you may decide that rates have fallen far enough for it to be worth fixing for longer, so you know where you stand.”
What does it mean for first-time buyers?
Today’s increase will be just as painful for first-time buyers who’ll face heightened rates.
But while it’s unlikely to deter some buyers, especially now that some lenders are offering 100% mortgages – many may no longer be able to take their first step to buy their own home.
Alice said: “For first-time buyers shopping around for a fixed rate deal, another interest rate rise will only heighten anxiety levels as they take their first tentative step onto the property ladder.
“First-time buyers have been helped to prop up the property market over the past couple of months as they look to escape high rental rates and the dwindling supply of good-quality stock.”
But growing interest rates also have a negative effect on the rental market too.
David Hannah, group chairman at Cornerstone Tax said: “The rental market has already been suffering from a lack of supply, and now, with a growing number of would-be buyers in need of a place to live, this is going to be exacerbated further.
“The result of this is that rental prices and competition will likely increase at a time when people are already struggling.”
The cost of borrowing through loans, credit cards and overdrafts could go up too, as banks are likely to pass on the increased rate.
After consecutive rate rises by the BoE, interest rates on credit cards and personal loans already hit a record high in December, according to Moneyfacts.
Many big lenders – like Lloyds, MBNA, Halifax and Barclaycard – link their credit card rates directly to the Bank of England base rate.
That means their credit card rates will hike automatically in line with any changes to interest rates – but you’ll be given notice before this happens.
You can check the terms and conditions of your credit card to see if the rate can go up when the base rate does.
Certain loans you already have like a personal loan or car financing will usually stay the same, as you’ve already agreed on the rate.
But rates for any future loan could be higher, and lenders could increase the rate on credit cards and overdrafts – although they must let you know beforehand.
You can cancel a credit card if you want and will have 60 days to pay off any outstanding balance.
What does it mean for savers?
The hike is likely to be good news for savers as banks will continue to battle it out to offer market-leading interest rates.
A rate rise is generally good news for savers, especially after a long stretch of getting very low returns.
Savers looking to make the most of their deposits can already get more back after savings rates hit a 14-year high last week.
Isbank, a Turkish bank that operated in the UK, has exclusively launched six new savings accounts on the Raisin UK marketplace.
All accounts pay customers 5% back on their deposits.
Traditional high-street banks have been accused of resisting passing on higher interest rates to savers in recent weeks.
But savvy savers can still get decent returns on their deposits by looking away from traditional high street banks and scouting for accounts offered by challenger banks.
Anyone currently getting a low rate on easy-access savings might want to look around for a better rate.