HOMEOWNERS are facing soaring mortgage costs after the Bank of England hiked interest rates to 1.75% today.
The Bank of England increased the base rate of interest by 0.5 percentage points – the biggest hike in 27 years.
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The Bank of England’s monetary policy committee (MPC), which has nine members, voted eight-to-one in favour of a rise to 1.75%.
One member – Silvana Tenreyro – was out-voted in calling for a quarter point rise to 1.5%.
Households have been warned of a “Black Thursday” of financial misery today with a triple whammy of rising interest rates, soaring energy bills and runaway inflation.
Today the Bank warned that the UK was set to enter recession this winter, with the economy forecast to fall by as much as 2.1%.
Inflation is likely to peak in October at 13.3% – the highest level since September 1980.
Alice Haine, personal finance analyst at Bestinvest, said: “It is unusual for a central bank to raise rates when the economy is in danger of falling into a recession.
“But the country is in the grip of a cost-of-living crisis as global challenges such as Ukraine’s war with Russia drive up food and fuel prices to dizzying highs.”
UK heading for recession
The dire economic conditions will see real household incomes drop for two years in a row, the first time this has happened since records began in the 1960s.
They will drop by 1.5% this year and 2.25% next.
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However, the recession is expected to be shallower than the 2008 crash, with GDP dropping up to 2.1% from its highest point.
Bank officials said that the depth of the drop is more comparable to the recession in the early 1990s.
Unemployment will start to rise again next year, according to the projections.
Jane Tully, director at charity the Money Advice Trust, added: “Today’s interest rate rise will add to the worries of homeowners already struggling with soaring prices.
“October’s energy price rise is just around the corner and with inflation predicted to continue to increase into next year, there is little respite in sight for millions of people.”
What the rate rise means for mortgages
And anyone on a variable or tracker mortgage will be the first to feel the effects of the increase.
These mortgages are linked to the Bank’s base rate – so when it goes up, so do your monthly repayments.
There are around 1.9million homeowners with these mortgages.
The latest hike – the biggest since 1995 – is expected to add £888 a year on to their repayments.
That’s based on a £250,000 mortgage with a 25-year term, according to figures from broker L&C Mortgages.
But for many people, the impact will be even greater.
The average UK house price shot up 12.8% over the past year to £283,000.
The bigger your mortgage, the more your repayments will go up when interest rates rise.
Bestinvest’s Haine added: “The worrying effect of higher mortgage payments is that people have less disposable income to spend at a time when household finances may already be stretched thin.”
Soaring mortgage rates
Already mortgage rates soared at their fastest pace in a decade in the six months to May.
Typical two-year fixed rates have rocketed by as much as 166% since the start of the year.
According to TotallyMoney, with rates at 1.75%, a typical household on a variable rate mortgage will be paying £196 a month more than they were in November – that’s an extra £2,352 a year.
Andrew Hagger, personal finance expert at Moneycomms, said: “The decision to hike rates for the sixth time since December will make borrowers wince at the thought of yet higher monthly mortgage costs.
“Customers on a fixed rate will avoid immediate financial pain, but for many of them, a triple digit increase in monthly repayments is inevitable next time their mortgage deal comes up for renewal.”
Around 75% of mortgage holders are on a fixed rate deal and will not be affected by today’s rate hike.
These mortgages let you lock in at a certain interest rate for a set period – this shields you from any rate hikes.
But these homeowners are likely to see their repayments shoot up when their fixed deal comes to an end and they either look for another fixed deal or move onto their provider’s Standard Variable Rate (SVR).
According to Moneyfacts, a typical two-year fixed mortgage rate was 2.52% in August 2021 but has risen to 3.95% today.
An average five-year fixed deal is now 4.08%, up from 2.75% a year ago.
Laura Suter, head of personal finance at AJ Bell, said: “Anyone coming to re-mortgage in the next couple of months faces a huge shock in how much their monthly costs are going to rise.
“Someone coming off a two-year fix would have secured their last mortgage when rates were far lower.”
What to do now
Mortgage lenders are quick to react when interest rates rise and will usually pull their cheapest deals fairly quickly.
If you are currently on a variable or tracker mortgage rate then it’s too late to do anything to beat today’s hike unfortunately.
But some experts say that rather than panicking and locking in a rate in the days after the hike, you might be able to get a better deal in a couple of weeks when the market has calmed down.
Either way, locking into a fixed rate deal will give you certainty over your repayments for a set period of time and protect you from future rate hikes.
Shopping around for a mortgage deal yourself can be complicated, but an independent broker will be able to help.
If you are struggling to meet monthly repayments then extending your mortgage term can make them more affordable – but it will mean you end up paying more interest over the long-term.
First-time buyers should be sure to take advantage of the Lifetime Isa, which gets you a 25% bonus from the government on money you save for a house deposit.
