Nearly two million homeowners face higher mortgage repayments after the Bank of England hikes rates by 0.5.%
The Bank of England has increased interest rates by 0.5% as it continues to battle high inflation.
The move leaves the Bank Rate at 2.25%, its highest level since 2008.
It was the seventh meeting in a row at which its Monetary Policy Committee has hiked the official cost of borrowing.
The change will add around £50 a month to repayments for someone with a £200,000 mortgage.
Around 850,000 people have a tracker mortgage, while 1.1 million are on their lender’s standard variable rate, both of which move up and down in line with the Bank Rate.
Homeowners with variable rate mortgages have now seen their monthly payments rise by more than £200 a month since December, adding to the pressure they face from spiralling energy and food prices.
The latest increase is also bad news for first-time buyers, as higher interest rates reduce the amount they can afford to borrow.
Our research found that the increase from a 2% mortgage rate to a 4% one means the average first-time buyer will need an addition £12,250 a year in income for repayments to remain affordable.
What happens next?
The Monetary Policy Committee (MPC) has now hiked interest rates by 2.15% since it first started to raise the cost of borrowing in December last year in a bid to combat high inflation.
Despite inflation dipping slightly to 9.9% in August, the MPC warned that it had not yet peaked.
It expects inflation, as measured by the Consumer Prices Index, to continue rising to reach a high of 11% in October.
It said the peak would be lower and come sooner than previously thought as a result of the energy price freeze introduced by Prime Minister Liz Truss.
But it warned that the energy price freeze, and other measures that are expected to be announced in tomorrow’s mini-Budget, would lead to inflation remaining higher for longer.
This suggests the MPC may have to increase the Bank Rate by more than previously expected.
Rather ominously, the MPC warned in the minutes accompanying its interest rate decision that it would “respond forcefully, as necessary” to get inflation back to its 2% target.
It is also worth noting that while five members of the MPC voted to raise the Bank Rate by 0.5%, three members wanted to go for a more aggressive 0.75% hike.
As a result, interest rates are widely expected to be increased again in the coming months.
Economists are now predicting that interest rates will rise to between 3% and 4% during the first half of next year.
There was further bad news for homeowners, as the MPC also warned that it expects economic growth to contract by 0.1% in the three months to the end of September, which combined with the contraction in growth seen during the previous three months, would mean the UK was in recession.
On the face it, a recession, combined with rising mortgage rates and living costs, suggest the housing market will start to slow sharply in the final part of this year.
But if the government announces a stamp duty cut in its mini-Budget, as predicted, this could lead to a pickup in demand, providing support for house prices.
What should I do now?
If you are sitting on your lenders standard variable rate (SVR), the rate you are automatically put on when your mortgage deal ends, you should remortgage without delay.
The average interest rate charged on SVR mortgages was already 5.4% before the latest interest rate hike, its highest level for more than a decade, and it is likely to increase further.
Although other mortgage rates have been on a steady upward trend since December, you could still save £136 a month by switching to a typical two-year fixed rate of 4.24%, based on a £200,000 mortgage.
Adrian Anderson, director of property finance specialists Anderson Harris, said:
“The message to mortgage borrowers is very simple – don’t wait, take action now as its likely the situation will get worse in the short term.
“This is a huge reality check. We are no longer living in a period of ultra-low interest rates with plenty of disposable income, our outgoings are increasing faster than our income and we are going to have to adjust quickly and get used to the new norm.”
If you are on a fixed rate deal the situation is less urgent, as your monthly repayments will stay the same for the length of your product term, usually two or five years.
But if you are close to the end of your product term, you should try to find a new mortgage as soon as possible.
Most lenders will allow you to ‘book’ a new rate between three and six months before your current one ends.
Those coming off fixed rate deals should brace themselves for a significant increase in monthly repayments.
The average interest rate charged on a two-year fixed rate mortgage has increased from 2.24% two years ago, to 4.24% now, meaning someone with a £200,000 mortgage would see a £217 rise in monthly payments.
Those coming to the end of a five-year fixed rate will have seen average rates rise from 2.77% when they last remortgaged, to 4.33% now, leading to a monthly jump of £171 in repayments.
The decision of whether to remortgage is more complex for people on tracker mortgages, which move up and down in line with changes to the Bank Rate, and those who have more than six months left on a fixed rate deal.
If you are in this situation, before deciding whether to exit your current deal early, it is important to find out if you would face any early redemption penalties.
You should also try to calculate whether it is worth switching to a new mortgage now, which will likely have a higher interest rate than your current one, or wait until it ends but accept that mortgage rates will likely have increased again by then.
See out guide Will mortgage rates keep rising and should I remortgage now? for more details.
How can I reduce my mortgage repayments?
If you are about to remortgage and are worried about the increase in repayments you might face, there are steps you can take to reduce them.
One of the easiest ways to lower your repayments is to borrow less. As a result, you may want to consider making a lump sum overpayment to reduce the size of your mortgage if you have the savings to do so.
Alternatively, you can cut your monthly repayments by increasing your mortgage term.
For example, monthly repayments on a £200,000 mortgage on a fixed rate of 4.24% would be £1,252 if the mortgage was being repaid over 20 years.
But monthly repayments would fall to £992 if the term was increased to 30 years, and to £922 if it was being repaid over 35 years, although doing so would mean you paid more in interest over the entire life of your mortgage.
It is also worth remembering that although interest rates have increased, the value of your home is also likely to have gone up since you last remortgaged.
As a result, you will be borrowing a lower proportion of your property’s value than previously, known as the loan-to-value (LTV) ratio.
Lenders offer their most competitive rates to people with lower LTVs, so you may now qualify for a better rate than previously.
What can I do if I’m already struggling with my mortgage?
If you are already struggling to keep up with your mortgage repayments or think you may do so in the near future, it is important to contact your lender as soon as possible.
There are a number of steps lenders can take to help you, including granting you a temporary payment holiday or putting you on to an interest-only mortgage for a short time.
But options become much more limited if you have already missed a payment.
Key takeaways
- The Bank of England has increased interest rates by 0.5% to 2.25% as it continues to battle high inflation
- The change will add around £50 a month to repayments for someone with a £200,000 mortgage
- Around 850,000 people with a tracker mortgage and 1.1 million on their lender’s standard variable rate will be affected