Interest rates: 2 million homeowners face increase in mortgage payments

·4-min read
The Bank of England raised interest rates to 1.25% on Thursday. Photo: Getty
The Bank of England raised interest rates to 1.25% on Thursday. Photo: Getty

Mortgage bills are set to rise for millions of UK homeowners after the Bank of England (BoE) hiked interest rates for the fifth consecutive month to tackle inflation.

The central bank lifted the key rate by 25 basis points to 1.25%, the highest in 13 years and a level not seen since the financial crisis.

Britains's inflation rate is currently running at a 40-year high of 9%, and last month Threadneedle Street said it expected it to hit 10% this year due to higher energy, fuel and food costs.

It now anticipates inflation to soar "slightly above" 11% in October — higher than previously forecast as households budgets face the tightest squeeze since the 1970s.

Threadneedle Street's latest hike is likely to pass onto homeowners in the form of higher interest rates on mortgage payments after previous hikes already pushed up repayments.

According to UK Finance, the rise in the Bank rate to 0.25% will roughly affect 2 million borrowers on variable rates will see their monthly mortgage payments increase in the short term.

It said the rises are likely to be "very modest" with rates expected to remain historically low overall.

The changes will not affect almost three quarters of all mortgage borrowers in the short term, extending into the medium term for the significant volume of borrowers locked into longer term fixed rate products.

Chart: UK Finance/Bank of England
Chart: UK Finance/Bank of England

UK Finance added that the proportion of fixed rate mortgage borrowers opting for five-year fixed rates has "increased significantly" in recent years, from fewer than three in 10 borrowers in 2017 to around 45% of borrowers last year.

Read more: Interest rate rise: What it means for your money

"The fifth consecutive month of rate rises in a row means that the base rate now stands at its highest level since just after financial crash at 1.25%," said Myron Jobson, senior personal finance analyst at interactive investor.

"What started off as a slow and steady journey to steer inflation towards a more manageable course is starting to look a bit more stomach churning for borrowers."

Chart: UK Finance
Chart: UK Finance

Experts have warned that even some people will struggle to get on the property ladders as the "small rate rise" makes it harder for buyers to meet lenders' affordability tests, also known as 'stress tests'.

"This may mean first-time buyers need to curtail their ambitions or save for a bigger deposit to reduce the amount they need to borrow," said Ashton Berkhauer, mortgage expert at MoneySuperMarket.

At present, around 850,000 homeowners with a tracker mortgage are set to see an immediate rise to their repayments as it's directly linked to the Bank's rate.

Although those on a fixed deal are unlikely to see an immediate change, they could see higher rates when they come to the end of the term, either when shopping for a new fixed deal or reverting to the standard variable rate (SVR).

Those who are currently on a SVR may see a more immediate increase in their mortgage rate. This could cost hundreds of pounds more for the 1.1million homeowners with this type of loan.

A 0.25% rate hike is estimated to add £40 a month, or £480 a year, to a £300,000 mortgage with a 25-year term, according to Hargreaves Lansdown.

Read more: Bank of England raises UK interest rates to 13-year high of 1.25%

Danielle Richardson of Which? Money, said: "This base rate increase will have an impact on mortgage holders and savers, at a time when money is tight for millions of households. Mortgage borrowers on fixed deals won't see any change to repayments, but those on a tracker or variable rate mortgage could see their rates increase.

"Borrowers on standard variable rate mortgages will also be vulnerable to future rate rises, so now could be a good time to consider switching to a fixed deal with more competitive rates.

"Interest rates for savers have been going up recently, albeit from record lows, but there is no guarantee that your provider will pass on the latest increase. Consider taking the time to research the market if you're looking for the most competitive deals."

Watch: Will UK house prices ever fall?