The Bank of England has hiked interest rates by 0.75 percentage points to 3% – the eighth rise since last December and the biggest since 1989. So what does this mean for your finances?
How will it affect mortgage payments?
It will hit many of the roughly 2.2 million people on a variable rate mortgage hard, at a time when other costs are rising. Many now face paying hundreds of pounds extra a year – and for some with bigger loans it will be thousands.
About half of that 2.2 million are either on a 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 previously at 3.5%, the interest rate would rise to 4.25%, adding £59 a month to a £150,000 repayment mortgage with 20 years remaining. If that were an interest-only mortgage, it would be an extra £93 a month.
SVRs change at the lender’s discretion, but most will go up, though not necessarily by the full 0.75 points. Some lenders may take some time to announce what they are doing.
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.
And new mortgages?
It’s been – and continues to be – a really tough time for anyone looking for a new fixed-rate mortgage, whether 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 unleashed chaos in the financial markets. The average new two-year fixed rate home loan surged from 4.74% on 23 September to 6.65% by 20 October.
However, in the last couple of weeks some lenders have started trimming their new fixed rates, slowly bringing the average new two-year fixed rate down to 6.46% on Thursday, according to Moneyfacts.
Nationwide building society has announced some quite big cuts: on Tuesday it reduced rates on some products by up to 1.3 points. However, to benefityou must be an existing Nationwide mortgage borrower looking to switch to one of its new deals.
Lenders had already priced in a chunky rate hike, and it is money market “swap rates” – which have been coming down in recent weeks – that largely determine the pricing of new fixed deals.
All this has led to “the strange phenomenon” of the base rate rising while new fixes remain stable or fall, said Sarah Coles,of investment platform Hargreaves Lansdown.
Deals available on Thursday included a 5.43% two-year fix from Virgin Money for people looking to remortgage.
However, Chris Sykes, technical director at broker Private Finance, said that as fixes still remained significantly more expensive, many borrowers who need a mortgage quickly may prefer a tracker deal, especially one with no early repayment charges (ERCs), as this offered greater flexibility. For example, HSBC currently has two-year trackers with no ERCs starting from base rate plus 0.69% – so 3.69% after the Bank rise.
What about those already struggling?
The latest UK Finance data showed the total number of customers in mortgage arrears continued to fall in the three months to the end of June. However, the number of homeowner mortgaged properties repossessed rose 5% compared with the previous quarter.
Cost of living pressures are clearly going to weigh more heavily in the coming months. Nevertheless, the property agent JLL said this week that “banks currently have a low appetite for repossessions … It takes two years to repossess a home, and in the current cost of living crisis it could be a difficult public profile position to be seen to be adopting a repossession strategy.”
The bottom line, experts say, is that provided someone is engaging with their lender and paying something, it is unlikely they will face repossession. UK Finance said it was “always a last resort after all other options have been exhausted”.
Some believe years of house price growth mean the property market may be better able to weather a downturn than some might have assumed. JLL analysed Bank of England data and found that 62% of the UK’s 8.4m mortgaged owner-occupier households had at least 25% equity in their property, while just 0.2%, or about 17,000, had less than 5% equity.
Will house prices fall?
One of the key drivers of house prices is what people can borrow, so higher borrowing costs will have a big impact. The property website Zoopla said this week that the labour market remained strong and that the supply of available homes was below average, creating a scarcity that would support pricing. But research from the property tech firm iPlace Global claimed 16% of homeowners are looking to sell up in the next year.
While much recent data has painted a picture of a market continuing to defy gravity, the latest Nationwide figures announced on Tuesday suggested the tide is finally starting to turn. Britain’s biggest building society said UK property values fell for the first time in more than a year last month, with the average price of a home down by 0.9% compared with September – the biggest monthly fall since June 2020.
Nationwide chief financial officer, Chris Rhodes, told MPs on Wednesday that it had four wide-ranging economic scenarios for what happens next, and “my best case is slowly increasing house prices, and my worst case is potentially a 30% fall” – though he added those were “the two extremes”.
Zoopla said it thought the most likely outcome for 2023 was “a modest decline in house prices of up to 5%”. On Thursday, the estate agent Savills predicted the average UK house price would fall by 10% in 2023 but then start increasing from 2024 onwards.
What about credit cards and loans?
The cost of borrowing is on the rise, and in some cases has hit record highs, even as the soaring cost of living forces people to put more on credit and take out loans.
The Bank of England this week revealed that the effective interest rate on credit cards increased to 18.96% in September – 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. However, most unsecured personal loans have fixed rates, so if you already have one, your monthly payment will not change.
The reality is Bank consumer credit figures do not capture the full picture, as they leave out debt such as “buy now, pay later”, informal loans from family and friends and last-resort options such as loan sharks, said Laura Suter of investment platform AJ Bell.
But is it good news for savers?
Savings rates are on the rise: there are a number of accounts out there paying 5% or so, and this will increase after this latest interest rate decision.
As of Thursday morning, according to Moneyfacts, the top rates available on easy access accounts included the 2.81% being offered by Al Rayan Bank, while for a five-year fixed-rate savings bond it was 5.1% from Gatehouse Bank.
But even if the latest base rate increase is passed on in full, the rate of inflation – currently 10.1% – is eroding the value of people’s nest-egg cash.