Bank of England’s Latest Rate Hike Raises Monthly Repayments by £60 for Homeowners with a £200,000 Variable Mortgage.

The Bank of England has increased interest rates by 0.5% to 5% as it continues to battle high inflation.

It was the 13th consecutive meeting at which the Monetary Policy Committee (MPC) has hiked the official cost of borrowing, with the Bank Rate now standing at a new 15-year high.

The latest increase adds a further £60 a month to repayments for homeowners with a £200,000 variable mortgage.

People with variable rate mortgages have now seen their mortgage costs jump by £566 a month since the MPC first started to raise interest rates from their record low of 0.1% in December 2021.

An estimated 850,000 homeowners have a tracker mortgage, and 1.1 million are on their lender’s standard variable rate – both of which move up and down in line with changes made to the Bank Rate.

Meanwhile an estimated 1.4 million homeowners who have fixed rate deals that expire this year will also face significantly higher rates than when they previously remortgaged.

The MPC had been expected to increase the Bank Rate by 0.25% 22 June 2023, but figures released 21 June 2023 showed that core inflation was still rising surprised markets, prompting economists to predict it would impose a larger hike.

Why is this happening?

The MPC has been increasing interest rates since the end of 2021 in a bid to bring inflation back down to its 2% target.

But the most recent figures showed that core inflation, which excludes volatile categories such as food and energy, increased to 7.1% during May, while headline Consumer Prices Inflation stalled at 8.7%, after edging down the previous month.

The figures suggest inflation in the UK has now become entrenched and is being driven by internal factors, such as wage increases, rather than external factors, such as the conflict in Ukraine.

As a result, it will be harder to bring down and interest rates are expected to have to rise further than previously thought, with economists now predicting they could peak at 6%.

But there was some good news, with the MPC continuing to say it expects inflation to “fall significantly further” during the rest of the year, and markets expecting it to begin cutting interest rates by the middle of 2024.

While today’s higher than expected interest rate rise may have come as a shock, it is important to remember that if the Bank Rate does peak at 6%, this is only slightly higher than the 5.5% to 5.75% markets had previously pencilled in.

What does this mean for mortgages?

For those on variable rate mortgages, such as tracker deals and standard variable rates (SVR), today’s increase will mean their mortgage rate will also rise by 0.25%.

People on fixed rate deals will be protected from the latest hike until they come to remortgage, as fixed rates remain the same for the entire product term.

The mortgage market has already been responding to higher than expected inflation, with lenders withdrawing nearly 400 products for repricing during the past month.

This recent large-scale repricing means much of the bad news has already been factored in, with rates edging up only slightly more today, to stand at 6.19% for two-year fixed rate mortgages 5.81% for five-year ones.

Even so, people coming to the end of fixed rate deals are likely to face significant payment shock when they come to remortgage.

Rates averaged 2.59% and 2.92% when people coming to the end of two-year and five-year deals respectively took out their loan.

What should I do if I need to remortgage?

If you need to remortgage, it is probably worth considering using a mortgage broker to help you navigate the current market, which is changing very quickly.

While five-year fixed rate mortgages currently have lower interest rates than two-year ones, it might still be worth opting for the latter, as mortgage rates are currently elevated and interest rates are still expected to start falling next year.

If you take out a five-year deal, you will be locking into these higher rates for a five-year period, whereas if you opt for a two year one, you will have the opportunity to remortgage in two years’ time, by which point rates are expected to be lower.

Whatever rate you decide to go on to, with standard variable rates – the rate you are automatically moved to once your current mortgage deal expires – currently averaging 7.52%, you should try to line up your next deal before your current one ends.

What should I do if I’m struggling to pay my mortgage?

If you are struggling with your mortgage payments, there are two main ways you can make them more affordable.

The first is to increase your mortgage term.

For example, monthly repayments on a £200,000 mortgage on a fixed rate of 6% are £1,450 if you are repaying it over 20 years, but fall to £1,210 if you increase the term to 30 years.

They fall even further to £1,150 if you repay the mortgage over 35 years.

If you do decide to go down this route, it is important to understand that although it will reduce your monthly repayments in the short term, you will end up paying a lot more interest over the entire life of your mortgage.

The second option is to talk to your lender about being put on to an interest-only mortgage for a period of time.

Only paying interest significantly reduces your monthly payments, although it does mean that the amount you owe is not being reduced, so you will need to resume full repayments at some point.

For example, if you have a £200,000 mortgage on a fixed rate of 6%, monthly repayments would be £1,304 on a repayment basis, but £1,000 on an interest-only one.

If you are really struggling, you can ask your lender for a short-term payment holiday. This enables you to take a break from making repayments, with the interest portion of your monthly payment added to your outstanding mortgage debt.

If you think you may run into difficulties, it is important to contact your lender as soon as possible.

Chancellor Jeremy Hunt yesterday said he would ensure that banks were living up to the commitments they made to the government in December to help borrowers who got into difficulties.

At the time, lenders agreed to be more flexible in the way they approached borrowers impacted by the cost-of-living squeeze.

Alongside offering tailored support to those in difficulties, they also agreed to enable customers who were up to date with their payments to switch to a new mortgage deal without having to do another affordability test.

In addition, they pledged to ensure highly trained and experienced staff were on hand to help customers when needed.

Key takeaways

  • The Bank of England has increased interest rates by 0.5% to 5% as it continues to battle high inflation
  • It was the 13th consecutive meeting at which the Monetary Policy Committee (MPC) has hiked the official cost of borrowing
  • The latest increase adds a further £60 a month to repayments for homeowners with a £200,000 variable mortgage