Interest Rate Hike A ‘a Bitter Pill To Swallow’

Thousands of homeowners with tracker mortgages will see their mortgage payments go up by an average of £50 per month following the Bank of England’s decision to raise its base rate again.

More than 1.6 million households on tracker and standard variable rate mortgages can expect to see an immediate increase in their monthly mortgage payments after a decision by the Bank of England to increase its base rate by 0.5% to 3.5%.

The latest figures from UK Finance reveals that 715,000, or 9% of mortgage holders in the UK, are on tracker mortgages, while 895,000, or 11%, are on pricy standard variable mortgages – the rate you revert to when your fixed term ends.

Industry reaction:

Steve Seal, CEO, Bluestone Mortgages, said: “As the UK heads nearer a recession, today’s decision will be a bitter pill to swallow for consumers and borrowers across the country as interest rates rise for the ninth consecutive month. We have already seen a significant drop off in lending activity as consumers are faced with ongoing high-interest rates and the squeeze on their personal finances. Affordability challenges will no doubt continue to be the key issue for most people next year.

“For those who are struggling due to the challenging economic environment, it’s important to remember that there’s help at hand. Not only have we already seen mortgage rates come back down again following the mini-Budget, but there’s a wide range of options to support customers with impaired credit history. Looking ahead, specialist lenders will continue to have a vital role to play in supporting people who do not fit the ‘vanilla’ criteria. It’s the duty of our industry and at the core of what we do to remind these customers that they can still make their homeownership dream a reality.”

Dominic Agace, chief executive of Winkworth, commented: “With the majority of mortgages on fixed terms reflecting swap rates and the government cost of borrowing, we expect the increase to have a muted effect, with rates on two- and five-year fixes set to continue to decline into the New Year to reflect the return of swap rates to pre mini budget levels easing pressures on those coming off fixed rates in 2023.

“Clearly, rates continuing to rise will affect housing confidence but it does feel that a flatter trajectory now being predicted and reduced fixed rate costs has improved the outlook for 2023, compared with the immediate aftermath of the mini budget.”

Marcus Dixon, director of UK residential research at JLL, said: “With the Bank still having to contend with double digit inflation, targeting 2%, this further increase in the bank rate to 3.5% was not unexpected. However, the latest CPI figures for October do suggest that we could have reached the crest of the wave, for inflation at least.

“The latest CPI figures for November show rates were marginally below forecast at 10.7% (forecast 10.9%) down from 11.1% in October. We expect bank rates to top out at around 4.5%, lower than some were forecasting a few months ago. This aligns with the assumptions in our house price forecasts, with prices expected to fall 6% in 2023 across the UK before beginning to recover in 2024.”

James Forrester, MD of Barrows and Forrester, commented: “A ninth consecutive increase in interest rates will do little to boost a weary property market that is already showing signs of wear and tear due to the higher cost of borrowing, with buyer demand falling and house prices now following suit.

“While a Christmas interest rate increase is as desirable as a pair of socks from your aunty, the silver lining to today’s latest hike is that this should hopefully be the peak, with less chance of a further increase on the cards for 2023.

“Should this be the case, the New Year should bring a far more settled outlook for the UK property market, as we adjust to a new normal following a turbulent few months.”

Tom Bill, head of UK residential research at Knight Frank, said: “Until the impact of the mini-Budget subsides, the UK housing market will exist in an alternate reality where mortgage rates fall and the bank rate rises. More clarity around the trajectory for house prices should come next spring as the mortgage market stabilises and the price expectations of sellers are fully put to the test.

“Mortgage rates will be at least 2 percentage points higher than this spring, which means it could be a ‘wake up and smell the coffee’ moment for the housing market. Higher borrowing costs will keep transaction volumes in check and mean that price declines become more widespread. We expect prices to fall by 10% over the next two years, not because of the mini-Budget but because the era of cheap debt will have come to an end.”

Lawrence Bowles, director of research at Savills, commented: “The Bank of England’s decision to slow the pace of rate rises today will bring some relief for mortgage borrowers, who have seen their debt costs balloon over the last few months. While rates today are the highest they have been for more than a decade, they have risen by less than markets or economists were predicting earlier in the year. It means affordability at the point of getting a mortgage offer will look slightly less stretched than we had anticipated previously.

“However, debt costs are still far higher than they were twelve months ago. This means we’re likely to see a slowdown in transaction activity from mortgaged buyers over the next few months, with cash buyers gaining a relative advantage. However, with the pace of interest rate hikes slowing and the possibility of rate cuts on the horizon, the picture looks like it will improve for mortgaged buyers in 2024 and beyond.

“On the assumption that interest rates peak then gradually ease back a predicted peak of 4% from the middle of 2024, Savills is forecasting that values will begin to recover and that the average UK house price will rise by a net figure of +6% in nominal terms over the next five years. This means that by the end of the forecast period (2027), the average UK house price is expected to be at £381,578, a £22,290 gain over five years. This will put prices a significant £92,000 above the pre-pandemic level, following two and a half years of considerable growth (+24% to the end of September).

“Those parts of the market that are less reliant on mortgage debt will outperform over the next five years. Only around a third of buyers in Prime Central London use any mortgage debt at all, compared to around two thirds on average across the UK. This is one of the reasons why we’re predicting more robust pricing in Prime Central London, with 13.5% nominal net growth over the next five years, more than double the growth we’ve forecast for mainstream UK prices.”

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