The Bank of England has voted to hike interest rates by 0.5 percentage points to 2.25% - the seventh rise since last December. So what does this mean for your finances?
How will it affect mortgage payments?
For the 2.2 million people on a variable rate mortgage, the rise is very bad news, leaving many having to pay hundreds of pounds extra a year. About half of them are either on a tracker directly linked to the Bank base rate or a discounted-rate deal, according to recent Financial Conduct Authority data. The other half are on their lender’s standard variable rate (SVR).
A tracker mortgage directly follows the base rate – the small print of your mortgage will tell you how quickly the rise will be passed on, but in the next few weeks your payments will almost certainly go up, reflecting the full base-rate rise. On a tracker previously at 3%, the interest rate would rise to 3.5%, adding £38 a month to a £150,000 repayment mortgage with 20 years remaining. Increase that £150,000 to £500,000 and another £128 a month will be needed.
With SVRs, things are less straightforward: these can change at the lender’s discretion, but most will probably go up. However, banks and building societies are likely to come under pressure to perhaps pass on only some of the latest increase to SVR borrowers. Some lenders may take some time to declare their intentions.
However, according to the FCA, about 6.3 million UK mortgages (74% of the total) are on fixed-rate mortgages, and so for the time being are insulated from the latest rise.
What about new mortgages?
Unfortunately for those on fixed rates, about half are due to expire within the next two years. For those looking for a new mortgage now, the Bank’s decision means higher borrowing costs.
The price of new fixed-rate mortgages had already been shooting up in recent months. A year ago, at the height of the mortgage price war, it was possible to lock into an interest rate of less than 1% for two or even five years. The likes of Halifax were offering two-year fixes priced from 0.83% and five-year fixes from 0.98%.
But now even the most competitive new two-year fixed rates, aimed at buyers with a large deposit, are in some cases priced at 4% to 4.5%.
Alice Guy, of the online investment platform interactive investor, said: “The interest rate rise will cause a huge amount of pain for mortgage holders. Someone coming to the end of a fixed rate deal with a £200,000 mortgage could be paying £4,300 more each year for their mortgage - an extra £358 per month.”
Some leading banks and building societies including Santander and NatWest had already increased the cost of their new fixed-rate deals by up to 0.8 percentage points on Wednesday, in anticipation of a chunky Bank of England rate rise.
Many other lenders will now reprice their deals upwards, although the Bank’s decision to lift the base rate by 0.5 percentage points rather than the 0.75 that many had forecast “might help stabilise market rates”, said David Hollingworth, of the brokers L&C Mortgages.
And those already struggling with payments?
The most recent UK Finance data, which runs to the end of June, paints a mixed picture. The total number of customers in arrears with their mortgages continued to fall in the second quarter of 2022. At the end of June there were 74,540 homeowner mortgages in arrears to the tune of 2.5% or more of the outstanding loan. That is 10% fewer than in the same period last year, said the banking body.
However, in terms of repossessions, 630 homeowner mortgaged properties were repossessed in the second quarter – up 5% on the first three months of the year. And cost of living pressures are clearly going to weigh more heavily on many people over the coming months.
UK Finance said repossessions taking place now were “almost exclusively historic cases which would under normal circumstances have taken place over the course of 2020 and 2021 and now need to conclude in the customers’ best interests ... Customers who are facing financial difficulties are encouraged to contact their lender early, as they stand ready to help.”
How will it impact on house prices?
The property market has been fuelled by cheap mortgages, so increases in the cost of borrowing will have an impact. However, all eyes are on the government, which could announce a stamp duty cut in Friday’s mini-budget – a move many commentators say would push property values even higher, further pricing out first-time buyers.
House prices have surprised many by continuing to rise, according to the Halifax and Nationwide respectively, and typically went up by 0.4% and 0.8% in August. Official data showed that the annual rate of UK price growth soared to 15.5% in July. But Halifax and many commentators have warned of a more challenging period ahead.
What about credit cards and loans?
Surprise, surprise: the cost of borrowing money is on the rise, and in some cases has hit new highs. It comes as the cost of living crisis forces people to put more on credit and take out loans to pay bills.
Credit card rates are variable but not typically explicitly linked to the base rate, so will not automatically go up, though they have been increasing in recent months. The personal finance website Moneyfacts said this week that between the start of June and the start of September, the average credit card purchase APR (which includes card fees) rose to an “all-time high” of 29.6% APR. A year ago the figure was 26%.
Meanwhile, average personal loan rates for new applicants have also gone up. For example, for someone borrowing £7,500 over five years, the typical rate earlier this week was 5.6% – up from 4.4% a year ago.
Most unsecured personal loans have fixed rates, so if you already have one that you are paying off, your monthly payment won’t change.
But it’s good news for savers, isn’t it?
It’s true that savings rates are on the rise, but even if the latest base rate increase is passed on in full, the rate of inflation – currently 9.9% – is eroding the value of people’s nest-egg cash.
In response to previous base rate increases, account providers have boosted some rates, although often not in line with the Bank’s move, and sometimes weeks or months later.
This week, the top rate available on an easy access account was about 2.1%, while for a five-year fixed-rate savings bond it was 3.75%.