The Bank of England’s move to hike interest rates by 50 basis points, lifting interest rates to 1.75%, the highest in 27 years, will drive homeowners to seek remortgage deals and further fuel cost of living concerns, says the industry.
The move is a bid to fight rising inflation, which the central bank predicts will hit 13% before the end of the year, and with some economists adding it could peak at 15% next spring. Inflation stood at 9.4% in June.
The rate rise is the sixth in a row since December, when the base rate stood at a historic 0.1% low.
Building Societies Association chief executive Robin Fieth says: “Another Bank rate rise, the sixth since December, will be unwelcome news for many homeowners. But with around eight in ten mortgage holders on fixed rates, it will take time for these rises to be felt by many borrowers, as they will continue to pay the same each month until their current deal ends.
“When those fixed rates end, most will choose either to re-fix with their current provider, or search the market. While rates remain comparatively low, we have seen fixed rates rise sharply since December and borrowers will need to consider the impact of increasing rates alongside all the other increasing demands on their monthly earnings.
“It’s likely to cost those at the end of a two-year fixed rate who remortgage to a new similar deal around £100 more a month. For those on five-year fixed rates, their remortgage is likely to increase their payments by around £60 a month.”
The Guild of Property Professionals Iain McKenzie chief executive says the central bank’s rate rises may cool rising house prices.
McKenzie says: “These decisions could also affect house prices in the coming months. Over the last two years, we have seen unprecedented demand for property, which is in large part due to the ultra-low interest rates that have made getting a mortgage easier.
“As more people have wanted to get their foot on the property ladder, house prices have soared. Another consecutive interest rate rise could make potential buyers more hesitant about taking on a mortgage. If it does, we will likely see property prices cool off in order to entice more people to buy.”
But SPF Private Clients chief executive Mark Harris forecasts that the Bank may be coming to the end of its series of rate rises.
Harris says: “Mortgage rates were always likely to increase again at this meeting but we are close to the end of rate rises.
“If you look at swap rates, then three, five and ten-year money is all lower than two-year money, suggesting the market feels rates will peak and start to come back down.
“That said, there is still value in fixed-rate mortgages and borrowers who need budgeting certainty should always fix. However, base-rate trackers are showing lower initial pay rates and for those who can afford to be wrong – that is, if rates rise, they can still afford their mortgage – they are beginning to look a better option.
“Lenders repricing upwards is not always entirely a response to a change in the cost of funds but a defensive mechanism to preserve service levels. If banks feel they are being inundated with business and might struggle to cope, they may edge rates up slightly to make them less attractive to borrowers.”
However, Financial Markets Online director Samuel Fuller sees much more pain ahead for homeowners and consumers over the coming year.
Fuller says: “The independent Bank has never before put rates up by this much, but that doesn’t mean inflation will now come down.
“World events are still causing havoc and, with the US Federal Reserve raising rates at an even faster pace, the Bank must walk a tightrope between killing off demand and continuing to import too much inflation due to a weak pound.
“The Bank is also soon to start selling off its mountain of gilts, which is already causing government borrowing costs to tick up. This could have unintended consequences too.
“Predictions of how bad it’s going to get seem to grow steadily worse, with credible forecasts that inflation will reach 15% early next year weighing heavily on sentiment.
“The UK might not have it as bad as places like Turkey, where inflation is pushing 80% a year, but that will come as cold comfort when the energy squeeze pushes the UK into dark and uncomfortable territory in the new year. Frankly, it’s an economic time bomb and rates are only going in one direction.”