Bank of England's interest rate rise sends shockwaves

Experts divided as millions of homeowners face higher mortgage costs

Bank of England's interest rate rise sends shockwaves

The Bank of England’s decision to increase the base rate by the biggest jump in 27 years will see millions of homeowners repaying thousands of pounds a year more for their mortgages, according to reports.

The BoE’s Monetary Policy Committee (MPC) yesterday raised interest rates from 1.25% to 1.75% in response to soaring inflation, which the MPC now expects to rise above 13% in the fourth quarter – 2% higher than its previous forecast and up from 9.4% in June.

In a grim reading of the current economic situation, the BoE added that the country was heading for a recession, with the governor of the BoE, Andrew Bailey, blaming Russia’s invasion of Ukraine and the subsequent rise in energy costs for the crisis.

He also predicted that rates would have to rise even higher, prompting some economists to suggest they could reach 2.25% as early as next month.

Read more: Bank of England announces another rate hike

According to The Resolution Foundation think tank, double-digit inflation could continue well into next year, reaching a peak of 15% at the start of 2023.

For many homeowners repaying a mortgage, the latest rate rise will cause further financial turmoil.

According to financial analyst Moneycomms and TotallyMoney, a 0.5 percentage point increase will see homeowners with an average £270,700 property paying £196 more per month compared to last November, before rates started to rise.

Kevin Brown, savings specialist at Scottish Friendly, calculated that the 0.5% rates increase on a £250,000 loan over 25 years would add approximately £65 a month, or nearly £779 a year.

According to reports, almost two million homeowners will immediately be hit by rising costs, including 1.1 million homeowners on SVR mortgages, and an additional 850,000 who are on tracker rates.

The BoE came in for heavy criticism from a number of high-profile economists and financial experts, including Grace Blakeley, who said the interest rate hike would not help to control inflation as it was being driven by rising energy prices.

Academic and accounting professor Prem Sikka tweeted that the latest rate increase would not only hit low to middle income families but also fail to check inflation.

In a scathing attack on the BoE, he said: “Inflation is driven by corporate profiteering, not by workers awash with cash. Higher interest rates will reduce disposable income (and cause) higher business bankruptcies.”

Chartered accountant and political economist Richard Murphy echoed the views, describing the BoE’s announcement as “dire”, while adding that the interest rate increase would cut consumption and force companies out of business.

Read more: BoE scraps affordability test – what do the experts say?

Within the finance and banking world, there were fewer harsh words directed at the BoE, although the overall outlook remained grim.

Simon McCulloch, chief commercial and growth officer at Smoove, said first-time buyers in particular would find it “increasingly difficult to find an affordable loan”, even though demand remained high and the market continued to perform strongly.

He said: “Today’s rate hike and the prospect of more to come means that those on a standard variable rate mortgage should consider looking at what options are available and perhaps locking into a more affordable fixed-term mortgage, before rates rise even further.”

Andy Sommerville, director at property data insight and technology provider Search Acumen, noted that the interest rate rises would increase “an already monumental workload for conveyancers” and add pressure on a “cumbersome property transaction process which reached a record 153 days in June, compared with 124 days pre-pandemic”.

Vikki Jefferies, proposition director at PRIMIS, described the rate hike as a “seismic decision in British monetary policy history”.

She said: “Faced with the task of reducing the highest inflation in four decades, it’s not surprising to see the Bank of England (BoE) flex its muscles to increase interest rates to combat the rising cost-of-living.

“Although some may understandably feel concerned, it’s encouraging that this decision comes as the Bank withdraws mortgage stress testing rules, making it easier for some buyers to get a foot on the property ladder. The housing market also remains robust, with demand for property remaining healthy.

“Brokers will need to be increasingly proactive to secure the best outcomes for their clients at a time when many consumers may be looking to lock-in or move to longer term fixed rate mortgages to protect themselves from further rate rises down the road. During these complex economic times, networks offer a wealth of resources and products to ensure brokers can provide choice and flexibility to cater to the ever-changing financial needs of their clients.”

Richard Pike, Phoebus Software sales and marketing director, welcomed the BoE’s move, saying it was evidence the Bank was “committed to its path of bringing down inflation”.    

He said: “For the housing market this of course means that mortgage rates will continue to rise in line with the Bank of England, which at some point will mean that people are less and less likely to want to take on more debt.  Although rates are still relatively low when you consider how cheap money has been…this landscape of increasing rates is a new phenomenon to many homeowners. Lenders are going to find that, even if the homebuyer market dips, the demand from borrowers to tie themselves into longer term fixes is going to increase exponentially.”

Pike went on: “Looking forward we have to consider whether we are getting to a point when we will see corrections in house sale asking prices, and if so how quickly and how far will prices fall?” 

Scottish Friendly’s Kevin Brown said the base rate rise would “squeeze household incomes even tighter” while adding that “the worst is still to come”.

He said: “Markets expect rates to increase to more than 3% by next year and this is on top of inflation soaring well into double digits in 2023, exceeding the Monetary Policy Committee’s previous forecasts.

“Homeowners on a fixed rate mortgage are unlikely to be affected by any change in the bank rate, but for those with variable deals today’s 0.5% hike is going to make a considerable difference.

“Plus, with the energy price cap set to rise again by at least £800 in October, the pressure on households is going to ratchet up. The net result will be people saving less and borrowing more to make ends meet.

“There are already signs that households have become more dependent on credit as the cost-of-living crisis has intensified. The latest figures from the Bank of England show the annual growth in credit card borrowing hit 12.5% in June, the highest level since November 2005.”

Katie Pender, managing director at Elderbridge, said the rate hike would bring “more pain than gain for weary consumers”.

She said: “Double digit inflation, rocketing living costs yet low savings returns makes for grim reading. It’s now estimated that 5.3 million households will have no savings at all by 2024, twice the current level. Plus, a further 1.7 million will be left with less than two months of income in the bank, making them susceptible to any unexpected outlays.

“For creditors, the message is clear. Get on the front foot and identify vulnerable and potentially vulnerable customers, and work with them now to deliver outcomes, not overdrafts, before it’s too late. Mortgage rates will go up instantly, yet savers see a clear lag in terms of realised interest, plus with rampant inflation outstripping any returns, more and more consumers will be finding themselves in very tight financial positions through no fault of their own. Sadly, the worst is yet to come, as the fiscal authorities look to curb inflation, so now it’s time to work with customers, not blame them and help drive solutions that work for all parties.”