The Bank of England has yet again raised interest rates, this time by 0.25 percentage points, taking the base rate to 4.25% in the 11th rise since December 2021. So what does this mean for your finances?
How will it affect mortgage payments?
Thursday’s move is yet another blow for the approximately 2.2 million people on a variable rate mortgage, whose monthly bills have been ratcheted up.
Roughly half of those are either on a base rate tracker or discounted-rate deal. The other half pay 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 one now at 5%, the rate would rise to 5.25%, adding £21 a month to a £150,000 repayment mortgage with 20 years remaining, moving the monthly payment from £990 to £1,011.
As recently as last June, the person in this example would have been paying £776 a month – so their home loan bill has jumped by 30% in nine months (assuming they have had their deal for a while).
Of course, for those with bigger mortgages, the numbers will be bigger. Increase the above mortgage to £500,000 and the payment will rise by £69 (from £3,301 to £3,370).
SVRs change at the lender’s discretion, but most will go up, though not necessarily by the full 0.25 points. Some lenders may take some time to announce their plans.
The average SVR has now gone above 7% for the first time since October 2008, according to the data provider Moneyfacts, so most people on one should probably switch to something cheaper.
Well over 6m UK mortgages (more than three-quarters of the total) are fixed-rate loans. These borrowers are insulated until their deals expire; for some that might be in one or several years’ time, for others it will be in the next few weeks or months.
What about new mortgages?
It’s been a rollercoaster time for anyone looking for a new fixed-rate mortgage, whether it’s to buy their first property or replace a deal that is coming to an end.
New fixes had already been getting more expensive after interest rates started their upwards journey, but they really shot up after Kwasi Kwarteng’s disastrous mini-budget last September. By late October, the average new two-year fixed-rate home loan had surged to 6.65%.
Since then, lenders have been gradually reducing the cost of their new fixed rates (money market swap rates largely determine the pricing of these deals). As a result, the average new two-year fixed rate stood at 5.3% on Thursday, according to the website Moneyfactscompare.co.uk. The average new five-year fix has dipped below 5% and stood at 4.96% on Thursday.
However, there are best-buy deals available that are quite a bit cheaper than that, particularly for those with a lot of equity in their property or able to stump up a sizeable deposit. If you want a five-year fix now, you might be able to get one starting with a three.
On Thursday, new two-year fixes for those looking to remortgage could be picked up from 4.26% from Lloyds Bank, which was also offering five-year fixes starting at 3.89%. Halifax, HSBC and NatWest also had five-year fixes priced at just below 4%. Nationwide was among the lenders that cut its new fixed and tracker rates following the Bank’s announcement.
Karen Noye, a mortgage expert at the wealth management firm Quilter, said new fixed rates were likely to continue falling, particularly if swap rates were maintained and competition between lenders vying for business continued to rage.
Mark Harris, the chief executive of the mortgage broker SPF Private Clients, said borrowers might be tempted to wait for rates to fall further, “but there is a danger that they might not, and trying to predict interest rates can be a dangerous game”.
What if I’m already struggling with payments?
The most recent UK Finance data shows there were 75,170 homeowner mortgages in arrears in the final three months of 2022, which was up 1% on the previous three-month period.
On home repossessions, how good or bad things are depends on whose data you look at and how you interpret it. UK Finance said 500 homeowner mortgaged properties were taken into possession in the fourth quarter of 2022, which it added was down 29% on the previous quarter.
However, the most recent Ministry of Justice figures for England and Wales showed a marked increase in mortgage repossessions, with 733 in October to December last year – up 134% on the same quarter in 2021, it said.
However, comparisons with past periods are tricky as there was a ban on home repossessions for a time during the pandemic. As a result, there were only 10 repossessions from April 2020 to March 2021.
It is worth remembering that repossessions topped 9,000 in the first three months of 2009, in the aftermath of the 2007-08 financial crash, so things are very different now. Commentators have said that it typically takes two years to repossess a home, and that this is very much seen as a last resort.
Will house prices crash?
One of the key drivers of property prices is how much people can borrow, so higher costs will have a big impact: though as noted above, fixed-rate deals have been coming down in price in a trend that may continue over the coming months.
In recent months some of the big indices have shown price falls, but lately there have been suggestions that the property market – which, remember, defied the doomsters both in the run-up to the Brexit vote and again at the start of the pandemic – may be a little more resilient than some had anticipated.
According to the Halifax, the average UK house price increased by 1.1% in February after a 0.2% monthly gain in January, and the property website Rightmove said on Monday that the average asking price of a home had risen by almost £3,000 – or 0.8% – this month.
Many experts say the picture varies greatly depending on where you are in the country, making one-size-fits-all assessments and predictions difficult.
Myron Jobson, a senior personal finance analyst at the website Interactive Investor, said that spring, typically a busy season for the UK’s property market, “will provide the real acid test for the robustness of house prices”.
What about credit cards and loans?
Expect higher interest rates on credit cards and pricier personal loans for new applicants (remember that most unsecured personal loans have fixed rates, so if you already have one, your monthly payment will not change).
Earlier this month the Bank of England revealed that the average interest rate on credit cards nudged up to 19.9% in January. It was 18.96% last September. Credit card rates are variable but not typically explicitly linked to the base rate.
The Bank also said the average rate on new personal loans to individuals rose to 8.35% in January. Meanwhile, the typical overdraft rate rose to almost 21%.
But it’s more good news for savers, isn’t it?
Yes, that’s right, this should mean another boost to savings rates, which have been on the rise for a while now.
However, there is of course no standard savings account that can outpace inflation running at 10.4%. For the time being at least, inflation will continue to eat into the value of millions of people’s nest eggs.
And banks have been under fire from MPs and others recently for the paltry rates on some popular accounts – particularly instant-access ones. The Barclays Everyday Saver easy access account offers only 0.55% interest, and Santander Everyday Saver pays 0.6%. However, there are a number of easy-access savings accounts available paying more than 3%, according to Moneyfactscompare.co.uk.
Meanwhile, new five-year fixed-rate savings bonds were paying up to 4.6% on Thursday – though that is actually a little less than the 4.9% you could have got in the run-up to Christmas.