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‘Painful’ Bank of England decision to cost homeowners almost £1,000 a year

Andrew Bailey
Andrew Bailey

Over a million homeowners will pay hundreds of pounds a year more on their mortgages after the Bank of England held interest rates for the seventh consecutive time.

The Bank’s decision to maintain the base rate at 5.25pc could cost one in seven mortgage holders £500 more each year, rising to almost £1,000 in London, according to analyst Moneyfacts.

Experts said the decision was “painful” for homeowners and would leave them “hanging on every word” coming out of Threadneedle Street.

The Bank of England’s Monetary Policy Committee (MPC), which sets interest rates to achieve its 2pc inflation target, voted to maintain the current Bank Rate at 5.25pc on Thursday.

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The decision came despite inflation falling back to 2pc for the first time since July 2021 yesterday, in a boost for the Conservatives’ election campaign.

Around 15pc of mortgages are on a variable rate, according to UK Finance.

The Bank’s decision means the 624,000 people on a standard variable rate, which is the interest charged once a fixed or tracker rate mortgage comes to an end, will lose out. The same will apply to the 643,000 on tracker rates, whose interest rate rises and falls in line with the Bank of England base rate.

Figures from Moneyfacts show that on the average UK house price of £281,000, a 0.25pc cut for someone on the standard variable rate, would have reduced their annual mortgage repayment by £564.

In London, where the average house price is £502,000, the yearly repayment would have fallen £996.

The figures are similar for the average tracker mortgage, which would have brought annual savings of £516 across the UK and £924 in London.

There has been optimism of a fall in the bank rate for some time, which heightened after inflation started to fall quicker than expected, however, economists now forecast the first rate cut in August.

David Hollingworth, of broker L&C Mortgages, said: “There’s just a lack of relief for those on variable rates. You’re going to be hanging on every word that comes out of the Bank of England. There’s been a lot of talk about when the base rate will be cut and it’s painful for those still waiting for that. Sadly, it looks like it will be August at the earliest.

“It also means that the descent of the base rate hasn’t started as early as would have been hoped, so there may not be as many cuts as they were hoping for.

“Those who have drifted onto standard variable rate will be feeling it the most. If anyone is on a standard variable rate, they need to think hard about why and what alternatives might be open to them. For those that can’t switch lenders, looking at options for your current lender might make sense.”

Mr Hollingworth added that although there would be no immediate impact for the 6.9 million on fixed rates, the decision would still affect those coming to the end of their term.

“It does still have implications for all borrowers. If you look back at when inflation was 2pc, fixed rates were available at not much higher than 1pc. It‘s definitely tough times for mortgage borrowers full stop.”

The base rate has been at 5.25pc since August 2023, when the committee voted 6-3 in favour of raising it from 5pc. Some experts believe the bank rate could still fall to 4pc this year, before tumbling to 3pc in 2025.

Jason Hollands, of wealth manager Evelyn Partners, said economists are hopeful for an August cut.

He said: “Some MPC members will be reluctant to cut rates in the midst of a general election, which might open them up to criticism that they are providing a boost to the Conservatives. But the bigger factor that will likely result in a wait-and-see approach is that when you look beneath the bonnet, services inflation is still running very hot with an annual inflation rate of 5.7pc.

“It is possible we may see a cut at the August meeting, dependent on the data from here, but cuts this year remain on the cards.

“With Labour expected to enjoy a landslide victory, a rate cut early into the new administration will give them an early boost.”