The Bank of England has yet again hiked interest rates – the 13th consecutive rise since December 2021. This time the increase is a whopping 0.5 percentage points, taking the base rate to 5%. So what does that mean for your finances?
How will mortgage payments be affected?
Thursday’s move is yet more bad news for the 1.4 million people on a variable-rate residential mortgage. Roughly half are either on a base-rate tracker or discounted-rate deal, with the remaining 50% or so on their lender’s standard variable rate (SVR).
A household with a tracker mortgage currently at 5.5% will see their pay rate rise to 6%. These deals directly follow the base rate. This means their monthly payments will rise by £43 a month, assuming they have a £150,000 repayment mortgage with 20 years remaining. Their monthly payments rise from £1,032 to £1,075.
The increase may not sound like much, but as recently as last June that same household would have been paying £776 a month, meaning their annual payments have risen by £3,588.
A household with a £500,000 tracker mortgage with 20 years to go will see their monthly payments rise from £3,439 to £3,583 a month as a result of the rate rise. Back in December 2021, their mortgage was costing £2,356 a month – meaning their annual mortgage payments have risen by more than £14,780 in just 18 months.
SVRs change at the lender’s discretion, but most will go up, though not necessarily by the full 0.5 percentage points. Some lenders may take some time to announce their plans, but householders can similarly 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 deal expires. More than 350,000 borrowers will come off a fixed-rate deal between now and the end of September – many of whom had deals around the 2% mark. For this group, the shock is going to be enormous.
What about new mortgages?
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. This week’s inflation figures only added to the market turmoil that had already led to hundreds of mortgage products being pulled or repriced upwards in recent weeks.
On Wednesday, NatWest became the latest lender to tell brokers it was lifting the rate on selected two- and five-year fixed-rate deals by 30 basis points (0.3 of a percentage point). Others are expected to follow its lead in the coming days.
The average two-year fixed-rate mortgage on Wednesday hit 6.15%, while five-year deals were 5.79%. The Furness building society was offering the cheapest two-year fixed-rate mortgage at 4.43%, aimed at buyers seeking to borrow 80% of the property’s value. The Leeds building society had the cheapest five-year fix at 4.92%.
Meanwhile, for a first-time buyer of a £200,000 home with a £20,000 deposit, the Hinckley & Rugby building society had the cheapest two-year fix at 4.79% for those wanting to borrow 90%. Most other providers were over 5%. The Nationwide building society had the cheapest five-year deal at 5.04%. In October 2019, buyers could borrow at 2.1% fixed for two years.
This is good news for savers, isn’t it?
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, but the highest-paying instant access account (offered by Principality) is still paying only 4.15% when the current rate of inflation is over 8.7%.
In anticipation of Thursday’s increase in the cost of borrowing, several of the online savings providers have been upping rates in an effort to lure customers. Those happy to lock their money away for a year can now receive 5.7% from Raisin. Rates of about 5.5% can be found if you are happy to invest in a fixed-rate bond of two to five years’ duration. By contrast, the highest paying five-year fixed-rate savings bonds in March were paying 4.6%.
The Commons Treasury select committee has been campaigning to get the big high street banks to increase the savings rates offered to loyal customers. While the online accounts above are paying fairly attractive rates of interest, easy access accounts at many of the big banks are still offering pitifully low returns.
Will more people now get into mortgage arrears?
Frankly, yes. Arrears have already been rising and this week the Liberal Democrats said they had unearthed data suggesting that 1,250 homeowners have had to hand back the keys to their homes after falling behind on their mortgage repayments since September, the same month as the now infamous mini-budget.
This is equivalent to almost 50 households a week losing their homes amid soaring mortgage rates. Another 4,035 households are at risk of losing their homes due to mortgage repossession claims currently in the courts, up 40% compared with the same period last year, according to the Lib Dems. The party’s leader, Ed Davey, said the government must bring in “emergency support to help homeowners and renters on the brink, like there was after the last financial crisis”.
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2023-06-22 13:51:00Z
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