Today, the Monetary Policy Committee (MPC) announced its decision to increase the base rate to five per cent, up from 4.5 per cent. This was the 13th hike in a row.
The decision was made in a seven to two majority, with Swati Dhingra and Silvana Tenreyro being the only committee members to vote to hold the rate at 4.5 per cent.
Professionals in the financial and property markets said borrowers would need to plan ahead to make sure they were financially ready for costs to rise.
Borrowers’ ability to adjust
Will Hale, CEO of Key, said borrowers should not bury their heads in the sand and rely on rates falling any time soon.
He added: “Instead, they need to proactively consider all their options and speak to a mortgage adviser now who will be able to help them to make the right choice for their individual circumstances.”
Garry White, chief investment commentator at Charles Stanley, said: “Mortgage holders need to prepare for more pain ahead, as persistently high inflation means even more interest rate rises are likely in the coming months.
“Markets are now pricing in interest rates hitting six per cent by the end of the year, though this could be an overly hawkish stance. Rising mortgage rates, coupled with continuing price rises in goods and services, will act as a sharp brake on the UK economy, as households rein in spending. The impact of the mortgage squeeze on consumer incomes will lead to the underperformance of UK growth compared to the more favourable GDP growth forecasts that have emerged.”
Ben Woolman, director at Woolbro Group, said it was naïve to think that homeowners would just keep adjusting to higher rates.
He added: “Mortgagors are instead having to come to terms with the life-changing consequences of this latest rate rise which, for many, will be devastating.”
Woolman said this “turmoil” was years in the making as the “ineffective planning system” limited new development.
“If there was ever a time for the Prime Minister to publicly commit to reform of Britain’s outdated and ineffective planning system, it is now.
“Planning reform is the only long-term solution to Britain’s housing crisis. By bringing the supply of new homes in line with demand, we can eventually make homeownership a reality for those who today are completely priced out of the market,” he added.
Shock after prolonged low rates
Some professionals said people became too comfortable and complacent because rates were so low for so long.
Ross Boyd, founder and CEO of Dashly, said: “The consequence of a decade-long reliance on artificially low interest rates is now quickly unravelling. Alarming UK inflation figures sent shockwaves through the mortgage market, exposing the ineffectiveness of the Bank of England’s interest rate rises. This inflation surge stems from supply-side issues, not demand-side factors and a cold turkey approach could have disastrous effects.
“Merely curbing spending power will not miraculously impact shelf prices. It is high time for the Government and the Bank of England to pause, re-evaluate their strategies, and acknowledge the potential point of no return.”
Simon Webb, managing director of capital markets and finance at LiveMore, said the Bank of England initially promised that any rate increases following 13 years of low rates would be a “slow process” but added: “The opposite has happened.”
He said: “The unprecedented 13th consecutive rise in the base rate in 18 months, with further rises anticipated, is a price Chancellor Jeremy Hunt is willing to pay as bringing down inflation is the government’s ultimate goal.
“This latest rise is likely to be reflected in swap rates, which have almost doubled in the past year and therefore fixed rate mortgages will continue to be more expensive.”
Adam Oldfield, chief revenue officer at Phoebus Software, agreed, adding: “The fact that we have been living in an artificially low interest environment for so long means that, perhaps, some borrowers became complacent. Now the increase to their mortgage payments has come as a massive shock.
“Nonetheless, paying the mortgage is not optional and as such borrowers are going to need to adjust to this new environment, the new normal.”
Not fully expected
While the markets did widely predict a 0.25 per cent rise in the base rate, some industry professionals said the Bank of England should have considered taking a break from successive increases like other central banks.
Mark Harris, chief executive of SPF Private Clients, said the central bank should “hit the pause button”.
He said: “There is a strong argument for pausing rate rises for now, giving the market time to settle down and adjust.
“Consecutive base rate rises have been painful and done little to stem inflation which is proving to be worryingly stubborn; it’s time for a different approach, letting the impact of the rate rises so far take effect, rather than causing continued anxiety and distress for borrowers.”
Nitesh Patel, strategic economist at Yorkshire Building Society, said despite this being the 13th increase to the base rate, the reality of the rises were “yet to be felt”.
Gary Smith, partner in financial planning at Evelyn Partners, said there could be more “mortgage market mayhem” as many lenders had only priced in a 25 basis point move.
He said: “With the benchmark interest rate undergoing a step-change to a level not seen since September 2008, the coming weeks are likely to see a procession of raised loan rates – and a succession of eye-watering estimates of how much monthly and annual loan payments will increase as borrowers come off their cheap fixed deals.”
Ben Allkins, head of mortgages and protection at Just Mortgages said: “Many would have hoped that the MPC would follow the Federal Reserve – as it often does – and pause its rate rising agenda.
“But while the Fed pauses to assess the impact of existing increases, the same cannot be said for the Bank of England with stubborn inflation clearly proving too much of a threat to not raise base rate once again.”
