The Bank of England has yet again raised interest rates – the 14th consecutive increase since December 2021. After June’s unexpected half a point rise, this time the increase is 0.25 percentage points, taking the base rate to 5.25%. So what does that mean for your finances?
How will mortgage payments be affected?
Thursday’s increase is yet more bad news for the 1.4 million people on a variable-rate residential mortgage. Roughly half are on a base-rate tracker or discounted-rate deal, with the remaining 50% on their lender’s standard variable rate (SVR).
A household with a tracker mortgage now at 6% will see their rate rise to 6.25%. In turn, their monthly payments will increase by £21 a month, assuming they have a £150,000 repayment mortgage with 20 years remaining. Their monthly payments go up from £1,075 to £1,096.
That increase may not sound like much, but as recently as June 2022 that same household would have been paying £776 a month, meaning their annual mortgage bill has increased by £3,840.
A household with a £500,000 tracker mortgage with 20 years to go will find that their monthly payments increase from £3,583 to £3,654 as a result of the rate rise. Back in December 2021, their mortgage was costing £2,356 a month, meaning their annual bill has gone up by more than £15,000 in just over a year and a half.
SVRs change at the lender’s discretion, but most will go up, although not necessarily by the full 0.25 percentage points. Some lenders may take some time to announce their SVR plans, but householders can brace themselves for higher payments.
If you are among the more than 6.8 million households with a fixed-rate mortgage, you are unaffected by the latest rise, but only until your current deal expires.
What about first-time buyers, those hoping to remortgage or those needing a loan?
The past few months have been a horrible time for anyone looking for a new fixed-rate home loan, whether it is to buy their first property or to replace a deal that is coming to an end.
UK Finance said this week that there were about 800,000 homeowners with fixed-rate deals ending in the second half of 2023, while a further 1.6 million have mortgages due to expire in 2024.
Those in the former group, in particular, are staring down the barrel of massively increasing mortgage payments.
On Thursday, the data firm Moneyfacts said the average two-year fixed residential mortgage rate was 6.85% for the third day running, while the average five-year fixed rate had dropped to 6.36%. There are signs that rates may have flattened out. NatWest said it was lowering its mortgage rates by 0.2%-0.3%, while HSBC and a number of other lenders have made similar moves.
Despite that, households remortgaging are facing enormous payment increases. A buyer who two years ago took out a £200,000, 2% fixed-rate, 25-year mortgage has been paying £848 a month. If they can find a replacement deal at the best-buy rate of 5.5%, their payments will rise to £1,278 a month. If the only deal they can get is at 6%, they will be paying £1,338 a month.
Meanwhile, it is not just mortgages that are rising in price. The cost of taking out a personal loan has doubled over the past 18 months, and today’s increase will probably feed through to borrowers, and to those in debt to their credit card provider. Halifax recently increased the interest rate it charges its Clarity credit card customers from 21.33% to 23.55%, citing the base rate increases as the reason.
What does this mean for house prices?
You do not need to be a top economist to know that higher mortgage costs usually translate into lower house prices, and so it is proving now. UK house prices fell last month at the fastest annual rate in 14 years, according to the Nationwide building society, which said on Tuesday that July’s average price was 3.8% lower than a year ago. It comes on top of a 3.5% annual fall in June.
Robert Gardner, the Nationwide’s chief economist, said housing affordability “remains stretched” for those hoping to buy a home with a mortgage. “This challenging affordability picture helps to explain why housing market activity has been subdued in recent months,” Gardner said.
In June, there were 86,000 completed housing transactions, 15% below the levels at the same time last year and about 10% below pre-pandemic levels. If you are in the middle of a house purchase, the advice from some experts is to haggle hard and knock the price down.
This is good news for savers, is it not?
When the Bank started raising interest rates in December 2021, the very best easy access savings rate was paying just 0.67%. The succession of interest rate increases have made things better for savers, and the highest-paying instant access account (offered by Shawbrook) is now paying 4.63%.
Those happy to lock their money away for a year can now receive 6.05% from Atom. If you are happy to invest in a fixed-rate bond of two to three years’ duration, you will get over 6% with a host of providers. The highest paying five-year bond is now 5.81%, compared with the 4.6% best buy rate in March.
The Commons Treasury select committee has been campaigning to get the big high street banks to increase their rates. While the online accounts are paying fairly attractive rates of interest, easy access accounts at many of the big banks are still offering pitifully low returns. This week the banks were threatened with enforcement action by the Financial Conduct Authority if they failed to raise rates.
