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Interest rate rises to hit 40% of UK mortgages, warns Bank of England

Interest rates: Governor of the Bank of England Andrew Bailey
Interest rates: Governor of the Bank of England Andrew Bailey warned of the difficult trade off in bringing inflation back under control. Photo: Stefan Rousseau/Pool via Reuters (POOL New / reuters)

The pressure on home owners will only get worse with the Bank of England estimating that around 40% of mortgages will go up over the next 12 months as the central bank continues to increase interest rates.

“20% [of mortgages] are floating so they will see the interest rate increase come through immediately,” Sarah Breeden, executive director for Financial Stability Strategy and Risk at the Bank of England, told MPs at the Treasury committee on Monday.

“Of the 80% that are fixed, our data suggests that around a quarter of those come out of that in the next 12 months. Of that 100% stock of mortgages actually only 40% are going to see higher rates in the immediate period ahead,” she added.


However, she admitted that more of that “will pass through over the next year” as more fixed rate mortgages come to an end.

Read more: UK property: How house prices are changing where you live

Financial data provider Moneyfacts said the typical average standard variable rate (SVR) paid by UK mortgage borrowers rose to 5.06% at the start of July and is at the highest level since January 2009, when it stood at 5.14%.

SVRs are typically paid by borrowers who have come to the end of a fixed or discount-rate deal and are set at the discretion of lenders.

The Bank of England said although UK households will be squeezed on their mortgage payments, it will not be as bad as during the financial crisis of 2008.

Inflation in the UK is at record high levels
Inflation in the UK is at record high levels

“It would take a big increase, above and beyond what the market interest curve thinks at the moment, for that to happen,” governor Andrew Bailey told MPs.

A rise in borrowing costs, and the anticipation of further hikes in the coming months, are already cooling the property market.

Capital economics is predicting that UK house prices could fall by up to 10% as the Bank of England raises interest rates to tackle inflation.

Read more: New mortgage commitments rise despite cost of living crisis

The Royal Institution of Chartered Surveyors (RICS) recently reported that new enquiries from prospective buyers fell in May for the first time in eight months.

The Bank of England has increased the base rate five times since December, taking it from a historic low of 0.1% to 1.25%.

Each 0.25 percentage-point increase in rates will add about £16 a month to mortgage repayments.

UK interest rates
UK interest rates

Average mortgage rates have leapt by 0.5 percentage points in the last month alone.

Five year fixed-rate deals are now at an average of 3.89%, a 0.52 percentage point increase compared to June and the highest interest since November 2014.

The BoE is also seeing more families struggling to pay their bills amid the worst cost of living crisis of a generation

“We have picked up from some reports from consumer credit funds around the country of some increase in costumers wanting to rearrange their payment schedules,” Bailey said.

He also said that Bank was determined to bring inflation under control and that it will take slightly beyond two years to do so. Inflation will rise further this year but then fall a bit more steeply in the second year, Bailey said, reminding MPs of the difficult trade off the Bank has in ensuring the UK avoids the worst outcome of the global economic shock.

Watch: Will UK house prices ever fall?