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Base rate rise necessary but impact on vulnerable is concerning – industry reacts

  • 16/12/2021
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Base rate rise necessary but impact on vulnerable is concerning – industry reacts
Mortgage and housing market trade bodies say the Bank of England’s move to raise the base rate to 0.25 per cent is “proportionate” and “necessary” but the impact on vulnerable borrowers and the pace of future rises was a concern.


Today’s bank rate increase from its historic low of 0.1 per cent to 0.25 per cent took many by surprise.

A base rate rise was expected last month. But November’s Monetary Policy Committee (MPC) vote of seven to two in favour of holding rates at 0.1 per cent prompted speculation that no action to raise rates would be taken until the New Year due to the uncertain economic impact of Omicron, the latest Covid-19 variant rapid spreading in the UK.


Caught off guard

The MPC voted decisively, however, to raise the rate by 0.15 percentage points to 0.25 per cent in its latest committee meeting. The vote was eight to one in favour of an increase. It is the first time the base rate has been increased since August 2018 when it rose from 0.5 per cent to 0.75 per cent.

Andrew Montlake, managing director of Coreco, said: “Given the radical uncertainty created by the Omicron variant, this decision has caught many off guard. Most thought the Bank would hold off until the New Year given the speed with which things are escalating.”

Montlake said the decision showed the Bank of England was “prepared to get tough” to rein in inflation which rose again this week to 5.1 per cent – the highest in a decade. The Bank’s inflation target is two per cent.

Laura Suter, head of personal finance at investment platform AJ Bell, said: “Last month we were all geared up for a rate rise party, only for the punchbowl to be whisked away at the last moment. Fast forward a month and there was minimal expectation of an increase, only for the Bank of England to whip out a Christmas surprise for everyone with a hike.”


Necessary measure

Trade bodies the Intermediary Mortgage Lenders Association (IMLA) and Propertymark felt the rate increase had come at the correct time.

IMLA’s executive director Kate Davies said: “Today’s decision by the Bank of England will have come as a surprise to many, with popular opinion expecting the Bank to put off the increase until after the festive period. However, the decision feels like a proportionate and appropriate response to recent rises in inflation and in truth the effect on the mortgage market may remain minor in the short term.”

She added: “A key concern will be the effect of this decision on vulnerable borrowers, who are more exposed to the consequences of rising rates.”

Propertymark described the rise as a “small and necessary step” and not one that was expected to have a significantly negative effect on the housing market.


Modest mortgage impact

Around three quarters of mortgage borrowers are on a fixed rate deal and will see no change to their mortgage payment.

That leaves approximately 850,000 mortgage borrowers on a tracker rate mortgage and 1.1 million homeowners on a standard variable rate who will feel the effects of the rate increase, according to UK Finance.

UK Finance estimates that the 0.15 percentage point rise will lead to an average increase in repayments by £15.45 per month for tracker customers. For those on a standard variable rate this rise translates to an estimated increase of £9.58 per month on average.

Paul Broadhead, head of mortgage and housing Policy at the Building Societies Association said: “A rate increase is an important psychological moment as it is the first time that the Bank Rate has risen since August 2018. But right now we have just moved from the lowest bank rate ever, to the second lowest ever.”

Although mortgage rates are expected to remain low, within an hour of the news that the base rate had risen, banks and building societies moved swiftly to re-price deals for new borrowers.

“Given the rising costs of energy and food and the tax hikes coming next year, it is helpful that eight in ten mortgage borrowers are on a fixed rate,” Broadhead added.

“These people will continue to pay the same each month until their fixed rate period ends. The 20 per cent on variable rate mortgages are likely to see their payments rise, but I expect the increase to be modest, tempered by the highly competitive mortgage market which is still being driven by relatively high demand and a sparse supply of homes.”


Ripple of concern

The Bank’s decision to put the base rate up before the New Year, however, sent a ripple of concern through the market.

Andrew Wishart, property economist for Capital Economics, said the persistent strength of both the labour market and inflation suggested there was a risk that the bank rate would increase by more than currently anticipated, which would be more harmful to the housing market.

“The seamless end of the furlough scheme means that the Bank now expects the unemployment rate to continue to fall rather than tick up,” he said. “Job vacancies remain at record highs, and underlying pay growth was judged to be running at 4.5 per cent year-on-year in October compared to three per cent year-on-year prior to the pandemic. Meanwhile, the rise in CPI inflation to 5.1 per cent in November was well above the 4.5 per cent the Bank predicted six weeks ago.”

Montlake said that the big question was whether this was the start of a trend we could expect to see over the next 12 months. He added that it remained to be seen just how tough the Bank was prepared to get to curb inflation.

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