Earlier this month, the Bank of England raised its base interest rate by 0.5 percent, the biggest single increase in 27 years.
It is the last in a series of climbs. The base rate rose from 0.1 percent in December to 1.75 percent now, and the Bank’s Monetary Policy Committee has signaled it is willing to go further.
In its latest report, the Bank forecast that inflation, more specifically the consumer price index, will soar to 13.3 percent by the end of the year.
Mortgage rates have been rising due to rising base rates, amid rising energy bills and food prices.
Rate Hikes: The Bank of England has been raising interest rates incrementally since the beginning of this year. Its base rate has gone from 0.1% in December to the current 1.75%.
Since January 2022, interest on a typical two-year fixed mortgage has risen from 1.3% to 3.46%, according to an analysis by L&C Mortgages, increasing average monthly payments by around £159.
Borrowers are understandably eager to understand how much more they can get.
Part of the answer may lie in the ongoing Tory leadership campaign playing in the background.
As the two candidates, former Foreign Minister Rishi Sunak MP and current Foreign Secretary Liz Truss MP struggle to win over Conservative members, the impact of their economic policies on people’s finances has been a topic of debate among pundits. .
Some say Truss’s proposed tax cuts would lead to a base rate as high as 7 percent.
While such a high base rate may seem unthinkable to younger borrowers, there is historical precedent. UK interest rates averaged 7.15 percent between 1971 and 2022, reaching an all-time high of 17 percent in November 1979.
Capitalizing on this, Sunak’s campaign has created an online tool to calculate how much interest on people’s mortgages would rise with a 5 percent base rate.
What would happen to the base rate under Sunak is less clear.
We take a look at the impact that future rate hikes could have on the mortgage and housing market.
Some say the Liz Truss tax cuts could raise the base rate to 7%, while what would happen to the base rate under Rishi Sunak is less clear.
the situation today
Another rate hike?
Experts expect the Bank of England to deliver another 0.5 percentage point hike to its rate next month.
A Reuters poll found that 30 of 51 economists expect rates to rise from 1.75% to 2.25% in September.
The measure will deal a further blow to households facing higher borrowing costs.
Over the past few months, the market has been quick to react to base rate increases, with mortgage rates rising even before the central bank’s announcements.
This is a problem for mortgage holders, says David Hollingsworth, a mortgage broker at L&C. Borrowers have grown accustomed to low rates, and those nearing the end of a fixed agreement will be in for a payment shock that will cause “some pain.”
Anyone with a follow-up mortgage will automatically see their rate increase by the same amount the base rate increases, while those with standard variable rates are also likely to see costs increase.
However, 76 percent of borrowers are fixed rate, so the pain of higher rates will trickle down to borrowers rather slowly as they finalize their deals and remortgage.
Impact of an increase to 3 percent
The average fixed rate for two or five years is currently around 3.5 percent. Assuming rate increases are broadly reflected in fixed mortgages, that could mean an average of 4.75 percent if the base level were increased to 3 percent.
As for SVRs, the current standard rate at Lloyds, for example, stands at 5.24 per cent after the recent increase of 0.50 per cent.
If an increase to 3 percent is directly reflected in SVR, that would mean a rate of 6.49 percent. However, Hollingsworth says this is too simplistic a view.
“Even increases in SVR could become more measured if the base rate were to increase so substantially,” he says.
“When the base rate was in the mid-5 percent in 2007, the SVRs weren’t that high and often traded around 2 percent higher than the base rate.”
A £150,000 mortgage at 5.24 per cent over 25 years would cost £897.99 per month. At 6.49 per cent, the price rises to £1011.87, an additional £112.88 a month.
An increase in the base rate, even to 3 percent, would have a significant impact on the housing market, according to Raymond Boulger, senior technical manager for mortgages at broker John Charcol.
Experts say that while they don’t necessarily expect the base rate to hit 7%, such an increase could see house prices fall by as much as a quarter as mortgages become unaffordable.
“Based on current market expectations for the bank rate to top out at 2.5 to 3 percent, I think house prices will fall modestly next year, around 5 percent,” he says.
“But if the bank rate were to rise beyond 3 percent, I would expect a bigger drop. That would indicate that inflation will remain high for longer than currently expected, with all the impact that would have on cost of living pressures.”
Impact of rate increases to 5% and more
At 5 percent, mortgage experts say the market would start to experience significant stress.
Based on L&C calculations, an increase in base rate to this level would see SVRs rise to 8.49 per cent, or £1,206.83 a month on a £150,000 mortgage, an increase of £308.84 in current levels.
“An increase to a 5 percent bank rate would make life very difficult for many borrowers when their fixed rates end,” Boulger says.
At 7%, homes that are still affordable for many people at current mortgage rates of 3-4% would become unaffordable…resulting in a big drop in home prices.
“Many would not pass the affordability test to remortgage, but could still get a new deal from their lender with a product transfer.”
At 5 per cent, monthly payments on a £250,000 30-year repayment mortgage would be £1,462.
The effect of a 7 percent base rate on the market would be profound, Boulger says, and that’s before rising food costs and bills are factored in.
“Homes that are still affordable for many people at current mortgage rates of 3 to 4 percent would become unaffordable, resulting in a combination of fewer buyers and forced sellers who couldn’t afford the new higher rates when their rate will end in a big drop in house prices.’
The last major price decline occurred between the fall of 2007 and the spring of 2009, when prices fell 20 percent. If bank rates were to rise to 7 percent, Boulger says the UK could see a similar drop in prices of up to 25 percent.
What about the affordability stress test?
In theory, most people with a mortgage should be able to afford a 7 percent mortgage rate, since they would have been stress tested at around that level when they took out the mortgage.
Last month the Bank of England canceled its mandatory mortgage affordability test, but most experts expect lenders to continue testing borrowers’ finances at similar levels.
However, broker Oli Pearce of Guild Mortgage Services says the calculation would not have taken into account the huge inflation concerns plaguing households at the moment.
“Although technically people can afford the level of debt, they may not be able to afford the monthly payments,” he says.
Pearce also mentions the impact rate hikes will have on the rental market. Rising interest rates increase costs for private landlords, he says, and that will be reflected in rents for tenants.
“The alternative is for owners to start selling their shares and further reduce the availability of rental properties,” he adds.
‘Owners are already bearing the brunt of upgrading a property’s energy efficiency [to meet proposed regulations]tax changes and now potentially high mortgage costs, so renters are likely to see their rent payments increase if it goes much higher.’
The best mortgage rates and how to find them
Mortgage rates have risen substantially as the Bank of England base rate has risen rapidly.
If you’re thinking about buying your first home, moving or remortgaging, or are a buy-to-let landlord, it’s important to get good, independent mortgage advice from a broker who can help you find the best deal.
To help our readers find the best mortgage, This is Money has partnered with independent broker L&C.
Our L&C-powered mortgage calculator can allow you to filter offers to see which ones best match your home value and deposit level.
You can also compare different fixed-rate mortgage durations, from two-year arrangements to five-year arrangements to ten-year arrangements, with monthly and total costs displayed.
Use the tool at the link below to compare the best deals, taking both fees and rates into account. You can also start an online application on your own time and save it as you go.
> Compare the best mortgage deals available now
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