The Bank of England has once again raised interest rates – this time by 0.5 percentage points – taking the base rate to 3.5%. This is the ninth rise since last December. So what does this mean for your finances?
How will it affect mortgage payments?
Today’s move is yet more bad news for the approximately 2.2 million people on a variable rate mortgage, who are already having to contend with a raft of rising costs. Many now face paying hundreds of pounds extra a year.
About half of those 2.2 million are either on a base rate tracker or discounted-rate deal. The other half are paying their lender’s standard variable rate (SVR).
A tracker directly follows the base rate, so your payments will almost certainly soon reflect the full rise. On a tracker now at 4.25%, the interest rate would rise to 4.75%, adding £40 a month to a £150,000 repayment mortgage with 20 years remaining.
This person’s monthly payment would rise from £929 to £969. As recently as June this year, this same individual would have been paying £776 a month – so their home loan bill has now jumped by 25% in just six months (assuming they have had their deal for a while).
Of course, for those with bigger mortgages, the numbers will be bigger. Up that mortgage to £500,000 and the payment will rise by £135 (from £3,095 to £3,230).
SVRs change at the lender’s discretion, but most will go up, though not necessarily by the full 0.5 points. Some lenders may take some time to announce their plans.
However, about 6.3m UK mortgages (three-quarters of the total) are fixed-rate home loans. These borrowers are insulated until their deals expire – but for many that will be in the next few weeks or months.
What about new mortgages?
The last few months have proved a really difficult – and expensive – time for anyone looking for a new fixed-rate mortgage, whether it’s to buy their first property or to replace a deal coming to an end.
The price of new fixes had already been marching upwards, but really shot up after Kwasi Kwarteng’s disastrous mini-budget on 23 September unleashed chaos in the financial markets. The average new two-year fixed rate home loan surged to 6.65% by 20 October.
However, during the last few weeks, lenders have been gradually reducing the cost of their new fixed rates. It is money market “swap rates” that largely determine the pricing of new fixed deals.
As a result, the average new two-year fixed rate has gradually been falling and stood at 5.83% on Thursday, according to data provider Moneyfacts. The average new five-year fix was priced at 5.63% on Thursday.
However, there are best-buy deals available that are a fair bit cheaper than that: at the time of writing, new two-year fixes could be picked up from 4.85% from the likes of Lloyds Bank and Coventry building society.
Different lenders are taking different approaches: for example, Santander this week reduced all residential and most buy-to-let affordability “stress rates”, thereby allowing people to borrow more than before, said Chris Sykes, technical director at broker Private Finance.
What if I’m already struggling with payments?
The most recent UK Finance data shows that there were just over 80,000 mortgages (homeowner and buy to let) in arrears in the third quarter of this year, which was almost unchanged on the previous three-month period. However, the number of homeowner-mortgaged properties repossessed was up almost 15% on the previous quarter.
Cost of living pressures are clearly going to weigh more heavily in the coming months, and on Monday, UK Finance predicted the total number of mortgages in arrears would rise by 23% to reach 98,500 next year, which it said represented “about 1%” of all outstanding home loans. It is forecasting the total will rise again to reach 110,300 in 2024.
The banking body also predicted that the total number of mortgaged properties repossessed would jump from an estimated 4,100 this year to 7,300 in 2023, and then 9,700 in 2024 – although it said that was still a lot lower than has been seen in the past: there were 37,000 repossessions in 2011, for example.
Many commentators have said that it typically takes two years to repossess a home, and that this is very much seen as a last resort. Chris Rhodes, chief financial officer at Nationwide building society, last month told MPs that “if someone is engaging and paying something, they are unlikely to get repossessed at all … Repossessions compared to previous cycles will end up being materially lower.”
Some believe years of house price growth means the property market may be better able to weather a downturn than some might have assumed.
Will house prices crash?
One of the key drivers of house prices is what people can borrow, so higher borrowing costs will have a big impact. Though as noted above, fixed-rate deals have been coming down, and that may continue over the coming months.
It’s clear that house prices have already started falling: according to the Halifax and Nationwide, house prices fell by 2.3% and 1.4%, respectively, in November. Meanwhile, Rightmove said on Monday that the average asking price of homes being put on the UK market has fallen by 2.1% over the last month.
But whether prices will crash is another matter. It should be noted there were predictions in 2016 that house prices would slump if the UK voted for Brexit, and then a flurry of crash forecasts at the start of the pandemic in early 2020, but in both cases property values carried on going up.
Simon Bath, chief executive of home-moving website iPlace Global, said at present the housing market “is extremely sensitive”, adding that the future of the market hinged on consumer confidence, as well as the supply of homes for sale.
In terms of “official” forecasts, the Office for Budget Responsibility, the government spending watchdog, predicted last month that house prices would fall by 9% between the end of this year and the third quarter of 2024.
What about credit cards and loans?
The cost of borrowing is on the rise – just as the soaring cost of living is forcing growing numbers of people to put more on credit and take out loans.
At the end of November, the Bank of England revealed that the average interest rate on credit cards increased to 19.31% in October from 18.96% in September – which is thought to be the highest since records began.
Credit card rates are variable but not typically explicitly linked to the base rate.
Meanwhile, average personal loan rates for new applicants have also been going up. The Bank said the average rate on new personal loans to individuals increased to 7.23% in October, the highest level since the end of 2018.
However, most unsecured personal loans have fixed rates, so if you already have one, your monthly payment will not change.
Average overdraft rates fell very slightly, according to the Bank, so that’s a tiny bit of good news. However, these official consumer credit figures don’t include certain types of debt, such as buy now, pay later, so may not offer the whole picture.
It’s more good news for savers, though, isn’t it?
Savings rates have been on the rise for a little while now. As of Thursday afternoon, according to Moneyfacts, the top rate available on easy access accounts was 2.85%, offered by several building societies including the Coventry.
Meanwhile, new five-year fixed-rate savings bonds were paying up to 4.9%.
But even if the latest base rate increase is passed on in full, the rate of inflation – currently 10.7% – is eating into the value of millions of people’s nest-eggs.