Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said “inflation fears are expected to trump recession dread” at the BoE’s meeting next week.
She continued that the market expected interest rates to rise by 0.5 per cent to 3.5 per cent, which is below the historic 0.75 per cent rise seen last month.
Coles added: “It’s going to make life more difficult if your borrowing is linked to the base rate, but the impact on fixed rate mortgages and savings is more complicated. We may well see the weird phenomenon of base rates going up while savings and mortgage rates drop.”
SVR and tracker borrowers will be immediately impacted
Hargreaves Lansdown said that for homemovers on tracker mortgages or on a Standard Variable Rate (SVR) the “pain is going to be immediate”.
It continued that the number of people in this position could also have grown in recent months as borrowers coming to the end of the fixed rate deal rolled onto their SVR as they waited to see if fixed rates would come down.
Moneyfacts figures show that average SVR is 6.4 per cent and if the full rise is passed on then this could edge closer to seven per cent.
For someone on an average SVR with a £200,000 mortgage over 25 years this would be an extra monthly cost of £62.89 a month, bringing monthly repayments to £1,400.83.
Hargreaves Lansdown said that this would “make life incredibly difficult” for those who rolled over from a deal at two or three per cent and encourage some to take up a fixed rate deal.
The company continued that for fixed rate mortgages, it was likely that 0.5 per cent rise has “already been priced into the market”.
It noted that fixed rate pricing is “likely to continue on their current downwards trajectory”.
Hargreaves Lansdown said that the market now expects the base rate to peak at around 4.5 per cent or 4.75 per cent and then will fall back before recession takes hold. It explained that this means fixed rates would not need to be priced as high.
“Mortgage rates could fall further from here, but it’s not guaranteed, and there’s no clear picture of how long any more falls will take. Some of those sitting on an expensive SVR may decide to wait for the New Year, while others will be tempted to make the move, and cut their costs today,” it explained.
