Stubborn inflation figures revealed today increased the likelihood of the Bank of England raising its base rate by 0.5 per cent tomorrow, heaping more pain on mortgage borrowers.
Inflation in the UK stuck at 8.7 per cent, the ONS revealed, dashing hopes of a reduction. Core inflation – the important underlying figure that removes volatile food and energy costs – rose again to 7.1 per cent, the highest level since 1992.
The Bank of England has been expecting the core rate to drop to 6.8 per cent this month.
The inflation figures piled more misery on for a mortgage market where average two-year fixed rates had already continued to climb, rising from 6.07 per cent yesterday to 6.15 per cent today, according to data provider Moneyfacts.
At the start of the week, most expected the Bank of England’s ratesetting Monetary Policy Committee to hike base rate by 0.25 percentage points to 4.75 per cent. Now markets are pricing in a move to 5 per cent, further pushing up the cost of borrowing.
Rapid rise: Mortgage rates have spiked as the market has been thrown into chaos
This is likely to hit mortgage rates, as lenders respond to the increased cost of funding and fears that base rate will now peak at about 6 per cent. This is more than 1 per cent higher than the expected peak when the MPC last met in May.
For more than 1.5 million homeowners who need to remortgage this year – many of who will be on fixed rates below 2 per cent – the increases are piling further pressure on already-stretched household finances.
A borrower with a £200,000 two-year fixed rate mortgage over 25 years, faces paying about £420 extra per month now than in 2021.
> Why are mortgage rates rising so fast – and how high will they go?
In response to heightened base rate expectations, both gilt yields (the rate on UK government borrowing) and swap rates – the money market rates that lenders use to set fixed rate mortgage pricing – have increased substantially.
Five-year swaps are currently at around 4.79 per cent. On 22 May they were around 4.17 per cent. Similarly the two-year swap rate is now 5.47 per cent, up from 4.63 per cent in May.
Nicholas Mendes, mortgage technical manager at John Charcoal says, ‘Ultimately this isn’t good news for mortgage holders currently on a variable rate or approaching their final year of their fixed rate deal likely to be sub 2 per cent.’
The average two-year fixed mortgage rate is now 6.15 per cent according to Moneyfacts, up from 6.07 per cent yesterday.
The five-year fixed rate average is now 5.79 per cent, up from 5.72 per cent.
Justin Moy, founder at mortgage broker, EHF Mortgages: ‘This is a disaster for inflation and the government this morning, and pretty much guarantees a 0.5 per cent increase in base rate this week.
‘The Bank of England has no other tools or means to attempt to reduce inflation, and lenders have already priced their products for this.
‘The fear of god has already been put into borrowers this month, and there are plenty of panicking borrowers already this morning in my inbox screaming for help.’
> How do rising rates affect you? Use our True Cost Mortgage Calculator
The headline CPI came in at 8.7 per cent in May, the same as the figure for April
Several major lenders, including TSB, HSBC and Natwest, have repeatedly hiked their mortgage prices over the past few weeks on the expectation of increased interest rates.
As a result some brokers think lenders may have already priced in a 0.5 per cent base rate increase preventing a flurry of changes this week.
Mendes said: ‘I expect markets will now be pricing in a base rate peak of 6 per cent to 6.25 per cent, a substantial difference from a few months ago when this was 4.75 per cent.
‘Today will be interesting but I don’t expect to see a swath of lenders make withdrawals straight away. Lenders will be waiting for the market reaction following the governors comments tomorrow, but next week I expect to see the same movement of lender withdrawals and repricing.’
Swap rates – the main pricing mechanism for fixed rate mortgages – are nearly back to the same levels as after the mini-budget.
Rohit Kohli, director at The Mortgage Stop agrees, adding, ‘It is hoped that lenders have already factored in this potential rate increase, as there have been significant increases in rates over the past month. This could bring stability to swap rates and prevent frequent changes to lenders’ products.’
However, he warns that markets may become unsettled by the inflation figures and cause swap rates to rise we may see more increases and a knock to house prices.
Economic consultancy firm Capital Economics predicts that if mortgage rates hit 6 per cent for the first time since 2007 and stay at the level for several years, a 25 per cent drop in house prices would be likely.
Andrew Wishart senior property economist at Capital Economics, said, ‘While the total increase in mortgage interest costs is still set to be smaller than in 1988-1990 and 2002-2007, it will be borne by a smaller group.
‘The worst affected households are set to face an increase in their monthly mortgage payment of 50 per cent, which is similar in scale to the increases experienced in the late 1980s.’
