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Interest rates: How BoE's rate hike will impact mortgages and house prices

·Reporter
·6-min read
The Bank of England is expected to lift interest rates by 0.5% or 0.75% at its next meeting on 22 September. Photo: Daniel Leal-Olivas/AFP via Getty
The Bank of England is expected to lift interest rates by 0.5% or 0.75% at its next meeting on 22 September. Photo: Daniel Leal-Olivas/AFP via Getty

The Bank of England delivered its biggest interest rates increase in 14 years, on Thursday in an effort to tackle soaring inflation as the cost of living squeezes households.

Threadneedle Street hiked rates by a more dovish 0.5 percentage point, taking the key rate from 1.75% to 2.25%, the seventh successive rise since December 2021.

Read more: Bank of England hikes UK interest rates by 0.5% to 14-year high

So what does a 2.25% Bank Rate mean for your mortgage?

Watch: Will UK house prices ever fall?

Why is the Bank of England raising rates?

The Bank of England explained that the rise in rates was necessary due to external pressures such as increased oil prices which are expected to persist amid the Ukraine war.

That means that households and firms will continue to feel the weight through rising domestic prices, wages outpacing rampant inflation, and even higher mortgage repayments, despite Threadneedle Street’s attempt to widen the borrowing pool through less restrictive mortgage rules.

UK inflation reached 9.9% in the 12 months to August, down from the 40-year high of 10.1% in July, but it was still up on the 9.4% in June.

Read more: Will stamp duty cut push UK house prices up even further?

Although prices are currently running at nearly five times the BoE's 2% target, the central bank expects them to further increase, peaking at 13.3% in October.

Britain's economy has also entered a technical recession, according to the Bank.

The accompanying higher interest rates and bleak economic outlook generally means bad news for homebuyers, landlords and renters across the UK.

Read more: Hot property - More houses are being sold despite interest rate hikes

Mortgages

Last month’s move to 1.75% affected around two million homeowners almost immediately.

Analysts expect interest rates to rise further by 0.5% from 1.75% to 2.25% this month, or by 0.75% to 2.5%.

According to UK Finance estimates, this directly impacts mortgages on variable rates – around one in five households in the UK – and another 3.1 million whose fixed-rate periods expire in 2022-2023.

Borrowers whose repayments are directly linked to the base rate, as set by the Bank of England, face mortgage repayments at rates between 3% and 4%, up from 1.75% and 2.75% five months ago.

Read more: Pound falls below $1.13 after US Fed and Bank of England rate hikes

At present around 850,000 are on a tracker deal and 1.1 million are stuck on their lender’s variable rate.

Tracker mortgages directly follow the Bank's base rate, meaning people with this type of mortgage will see an immediate change. Standard variable rates follow a rate set by the lender, which usually closely follows the BoE’s interest rate.

According to credit broker TotalMoney and personal finance website Moneycomms for the average UK house costing £270,708, with a 75% loan-to-value, a 75bps hike could see mortgage repayments cost £274 per month more than in November 2021.

"Another increase to the base rate will pile pressure on the finances of over two million homeowners who may already be struggling with the soaring cost of living," Alastair Douglas, CEO of TotallyMoney said. "The latest interest rate hike is being closely followed by a new, higher energy price cap, further compounding pressure just as we head into the cold winter months."

Andrew Hagger, a personal finance expert from Moneycomms.co.uk, added: "Facing hundreds of pounds extra in mortgage repayments on top of soaring food, fuel and energy costs means some borrowers will face a serious monthly budget deficit."

Read more: UK average rent hits £1,051 per month

Rent

Rent costs have soared in recent months as demand for cheaper flats surges, with the average rent in the UK increasing by £115 per month since last year, to stand at £1,051.

The jump in borrowing costs is likely to eventually trickle down into rent prices, CMC Markets says.

Michael Hewson, chief market analyst at CMC Markets, said: "The buy-to-let market is equally volatile. Landlords will either pass the increased mortgage repayments onto tenants by increasing their rent or simply sell fast to lock in a better price.

"Right now though, those already on the property ladder are generally better off staying put rather than moving or re-mortgaging. They would not get a good deal on their old house in this market and may likely end up losing more money overall."

Millions of households will see their mortgage costs jump following the rate increase. Photo: Getty
Millions of households will see their mortgage costs jump following the rate increase. Photo: Getty

House prices

The latest figures show that despite the interest rate hikes, house sales have continued to rise in August.

Data from the HM Land Registry showed the provisional non-seasonally adjusted estimate of residential transactions in August stood at 114,440 – up 4.4% from July, and 9.7% higher than August 2021

House prices have also continued to soar, signalling that the end of the pandemic-era boom is not yet over.

In July, UK house prices increased at the highest annual rate since May 2003, the Office for National Statistics numbers showed.

Read more: UK is already in a recession, new data from Bank of England indicates

Annual house price growth was 15.5% during the month, up from 7.8% in June – the biggest increase in 19 years. The average UK house price was £292,000 in July 2022, which is £39,000 higher versus the same time last year.

However, experts anticipating a slowdown on the horizon.

According to the Centre for Economics and Business Research, 2023 could be a challenging year for the housing sector, with peak annual contraction of 6.2% expected in the third quarter, and prices expected to fall by 4.5% on average next year.

Read more: UK house prices expected to fall 4.5% next year

The government is also reportedly considering to cut stamp duty on property purchases in a bid to stimulate economic growth by encouraging more buyers onto the property ladder.

Prime minister Liz Truss and chancellor Kwasi Kwarteng could announce the measure as soon as Friday as part of the mini-Budget.

A stamp duty holiday is a "sign" that the government is worried, Sarah Coles, personal finance analyst at Hargreaves Lansdown said.

She added: "We will have to wait to see whether this comes to fruition. If it does, we don’t know whether it will effectively stimulate demand or whether we have stamp duty holiday fatigue at this stage.

"If it does encourage more buyers into the market, with an average of 36 properties on each agent’s books, we’re still close to an all-time low in the availability of property for sale.

"Driving demand without addressing supply would risk more buyers chasing a tiny number of properties, which would push prices up.

"This would mean higher monthly mortgage costs, which in itself could be enough to put buyers off. So if life continues to get increasingly expensive, a stamp duty holiday wouldn’t necessarily be enough to stop the housing market slowing significantly."

Watch: How does inflation affect interest rates?