Two-year fixed mortgage rates could hit seven per cent as the Bank of England seeks to tame runaway inflation, a financial expert warned on Thursday, as new data showed they surged further to 6.19 per cent.
Luke Hickmore, investment director of fixed income at abrdn, also stressed that many people will be forced to renew their mortgages in the autumn having taken them out two years ago during the Covid pandemic when stamp duty was reduced, often at a rate of around two per cent.
The Bank of England’s Monetary Policy Committee was expected to hike interest rates on Thursday, by 0.25 percentage points, or even 0.5, after official figures showed inflation entrenched at 8.7 per cent in May.
Asked what a six per cent Bank of England interest rate by the end of the year would mean for a two-year fixed, Mr Hickmore told BBC Radio 4’s Today programme: “The linkage between the two is never as clean as you want it to be when you trying to predict where things are going to go.
“But it would suggest in the high six, maybe even touching seven per cent for two-year fixed.”
That would be above the highs reached late last year in the wake of the mini-Budget crisis, when two-year fixed peaked at 6.67 per cent.
A seven per cent mortgage rate, being renewed from a two per cent rate, could add £990 to monthly bills on a £350,000 home loan with 25 years to run, or £11,880 a year.
For a household with a £150,000 home loan with 15 years to run, monthy payments would rise by £383, or nearly £4,600 a year, if the rate increased from two per cent to seven per cent.
New data released today from Moneyfacts shows that the average two-year deal now has an interest rate of 6.19 per cent, up from 6.15 per cent yesterday, while the average five-year rate rose to 5.82 per cent from 5.79 per cent.
Buy-to-let rates also rose, with the average two-year rate up to 6.49 per cent and the average five-year buy-to-let deal at 6.33 per cent.
The number of products on the market remained roughly stable after almost 150 products were pulled by lenders yesterday.
Rates crossed back over the six per cent threshold earlier this week, according to Moneyfacts, in anticipation of the Bank of England raising its own interest rates higher and keeping them there for longer.
Markets are predicting that BoE interest rates could rise to six per cent to force down inflation.
Economists agree that the Bank's Monetary Policy Committee (MPC) is likely to raise interest rates on Thursday, from the current rate of 4.5 per cent, and that more hikes are on the horizon.
Financial markets are expecting interest rates to rise by 0.25 percentage points to 4.75 per cent. But there is a 40 per cent chance that the rate could be pushed up even higher, by 0.5 percentage points to 5 per cent.
"Settling on the larger of the two risks adding fuel to the fire for rate expectations, a message the MPC will think long and hard about given the impact this would have for what is now termed the 'mortgage time bomb' for households and landlords that refinance borrowing," said Sandra Horsfield, an economist for Investec Economics.
Moreover, expectations of where rates will peak have surged in recent weeks, with markets now anticipating a high of 6 per cent by early next year. It would mean rates hit the highest level in more than two decades.
Chancellor Jeremy Hunt said he has spoken to consumer champion Martin Lewis, who on Tuesday said that a mortgage ticking time bomb is now "exploding", ahead of meeting with Britain's major lenders on Friday.
Banks have also come under fire from a group of MPs on the Treasury Committee for not raising savings rates as much as borrowing costs.
However, the Bank of England has said it will continue to raise interest rates as long as it sees signs of inflationary pressure.
Economists have said that important indicators of persistent inflation, namely core inflation, which strips out the price of energy, food, alcohol and tobacco, and wage growth, have remained elevated, which is likely to worry MPC policymakers.
Core CPI rose to 7.1% in May from 6.8% in April, the ONS said, and is often more in focus for the Bank when it sets interest rates
