While it was not unexpected, indeed Mortgage Solutions ran two features in the past week predicting the rate rise correctly, the Bank of England’s decision to up the base rate by 0.75 per cent to three per cent is a blow to borrowers and will be only exacerbate the affordability challenges in the market.
Steve Seal, CEO, Bluestone Mortgages, said that today’s decision would be a “tough pill to swallow for consumers and borrowers across the country” due to ongoing cost of living crisis.
“We have already seen a dip in the number of mortgages in the past month as consumers across the country grapple with high interest rates and the squeeze on their personal finances. Affordability challenges will no doubt continue to be the key issue for most people in the coming months,” he added.
Seal noted that for those struggling, there were still options to “suit their unique circumstances” and specialist lenders would “continue to have a vital role to play in supporting those who do not fit the ‘vanilla’ criteria”.
Base rate ‘won’t go much higher’
Mark Harris, chief executive of mortgage broker SPF Private Clients, said the market expected a 75 basis point increase and this would have been worse under Liz Truss’ government.
He added that swap rates have eased by around 100 basis points since the mini Budget and while three per cent may not be the peak of the base rate, “we don’t believe it needs to, or can go, much higher”.
Harris said that as money markets had already priced in their expectations it did not expect fixed rate mortgages to rise by an equivalent amount.
“Given how the markets reacted to recent political interventions, gilt yields and swaps have fallen so fixed rate mortgages could actually fall in coming days and weeks. Lender appetite and competitiveness may also increase as activity falls, adding further impetus to recent rate reductions.”
Rates still ‘low’ but more challenging
Simon Webb, managing director of capital markets and finance at LiveMore said that whilst this year we have “said goodbye to historical low interest rates of the past 13 years” and this was new for many, interest rates were still “relatively low”.
“The last time base rate was three per cent prior to 2008, was almost 70 years ago in May 1954. Nevertheless, the rise in mortgage rates will be difficult for many people, especially a generation who have only known low rates,” he said.
According to Moneyfacts latest figures, the average SVR is 5.86 per cent, the average two-year fixed rate mortgage is 6.47 per cent, the average five-year fixed rate mortgage is 6.32 per cent and the average 10-year fixed rate mortgage is 5.65 per cent.
This compares to an average SVR of 4.41 per cent, average two-year fixed rate of 2.29 per cent, five-year fixed rate mortgage of 2.59 per cent and 10-year fixed rate mortgage at 2.99 per cent in November last year.
SVRs and trackers hit by rise
Ben Bailey, chief customer officer at Even, said that for existing borrowers, the increase could mean “paying potentially hundreds more each year to service their mortgage”.
He added: “The move may also impact the availability of low-deposit mortgages, which are essential for those wishing to step onto the property ladder.”
Brian Murphy, head of lending at Mortgage Advice Bureau, said that those who have secured a fixed rate deal in the past couple of months will “breath a sigh of relief” but those on Standard Variable Rates or tracker mortgages would see the latest increases as a “real source of concern”.
“Expectations are that the industry will see an upwards trend of defaults on mortgage payments in the coming months, and so we urge anyone fearing that they may struggle with mortgage payments to go straight to their mortgage provider for guidance,” he noted.
Harris said that there was a growing trend towards tracker and variable rate mortgages with early repayment charges as borrowers hope that fixed rates would “‘settle at a lower level before they move over”.
“If interest rates don’t rise as far as previously feared, variable rates will prove to be increasingly attractive,” he said.
Harris said that those on trackers could see their mortgage payments rise by the full amount, pointing to a £200,000 base tracker mortgage at 3.25 per cent which could see monthly payments rise from £975 to £1,056. ‘
He added: “Those on variable rates are also likely to see an uptick in their monthly payments but the extent depends on their lender and how much of the rate rise it passes on via its SVR.”
First-time buyers face ‘hostile environment’
Industry figures agreed that first-time buyers would struggle in this rising interest rate environment and urged them to speak to a broker.
Murphy added that for prospective homemovers, it was a “hostile environment” in which to be buying and it was “doubtful that market conditions will become any friendlier in the near future”.
He urged homeowners to “prioritise future-proofing their mortgage and property ownership plans”.
Bailey added: “Anyone trying to buy their first home right now should consider speaking with a specialist broker that can connect them with bespoke mortgages for first-time buyers, including those that can help them boost their deposit.”
Rachel Springall, finance expert at Moneyfacts said that fixing for the longer term could be an “attractive choice” for those who “want peace of mind with their mortgage repayments”.
She continued: “However, whether now is the time to take out a new deal really will depend on individual circumstances, particularly for first-time buyers who may be struggling to build a deposit and who have limited disposable income.
“That said, because of rising house prices, those remortgaging may find they have more equity in their home to drop down into a lower loan-to-value bracket, where more competitive interest rates could be found.”
