Life Changing Consequences for Homeowners as Interest Rates Hit Highest Level in Over 15 Years

The Bank of England has just made the decision to increase interest rates from 4.5% to 5%.

This marks a 13th consecutive hike since rates were first increased in December 2021 from a low of 0.1% to 0.25%.

This is also the fifth consecutive interest rate increase seen so far in 2023, which has followed the same pattern as 2022 which saw 8 consecutive base rate jumps.

As a result, the current rate of 5% is the highest seen in over 15 years since April 2008 when the base rate also sat at 5%.

Susannah Streeter, head of money and markets, Hargreaves Lansdown, comments:

“Bank of England policymakers are feeling the heat, stuck on an uncomfortable platform with core inflation increasingly hot and sticky, which is why they’ve opted to super-size the rate hike, with a 0.5% increase.

The decision has sparked a fresh round of turbulence, with 2-year gilt yields falling back below 5% then shooting back above recent highs to over 5.1% as uncertainty reigns about how far rates will go.

Investors are trying to assess whether today’s big bazooka now, might be enough to stem further rate hikes or whether more will still be necessary.

The pound has had a case of the jitters, rising sharply to 1.283, before losing ground again to 1.276. Volatility is set to remain the order of the day as investors assess what impact this hawkish move will have on the UK economy.

This is the 13th rise in a row and it’s highly unlucky for mortgage holders on a variable rate or facing the prospect scrambling around to find a new fixed deal.

It’s not so much the stubborn headline rate of CPI which has prompted this move, but the worries that inflation-led wage increases are becoming embedded in the economy, pushing up the core inflation rate to a 31-year high of 7.1%, making it the outlier of advanced economies.

There was dissent around the table, with two policymakers to keep rates on hold and mind the gap, due to the lag effect of previous rate hikes.

The majority clearly believed acting hard and fast now, has greater potential to shove the immovable consumer prices in the right direction, rather than opting for multiple smaller pushes.

That’s not to say there will not be more to come, with the Bank stressing that if inflationary pressures persist more tightening will be required.

There are glimmers of hope that a tighter path of monetary policy may not have to be trodden, with forward indicators are already flashing that a larger drop in inflation is incoming.

Producer input price inflation eased sharply in May to 0.5% from 4.2% indicating pressures are easing further up the supply chain.

These are prices that will be passed on at the factory gate and should make their way onto our shelves.

The prospect of recession again looming, given the mortgage shock, may dampen down pay demands and reduce the wage spiral risks.

A fast train of realisation is set to hit that budgets are set for a big squeeze as refinancing costs escalate, and deadlines loom for a larger span of borrowers.

With borrowing costs shooting up again and many more companies and consumers set to tighten belts, the prospects of the UK avoiding a recession look very slim.”

EMEA and UK Head of Living Research at JLL, Nick Whitten, comments:

“Inflation continues to be a stubborn old beast remaining higher than expected, and for longer.

And this is driving the behaviour of the Monetary Policy Committee who have raised the base rate for an 13th consecutive meeting.

To complicate matters, many health indicators for the economy are currently at record highs or lows – there are few in-betweens.

For instance, core CPI has reached its highest level since March 1992, regular wage growth is at a record high, the volume of private housebuilding has seen the sharpest monthly decline for a decade and housing rental growth is at the highest rate for 30 years.

Alongside this, unemployment remains significantly low, which means the majority of mortgaged households can service their rising debt costs and avoid having to sell their home to make ends meet.

This will prevent a house price crash with many being forced to tighten their belt in other ways through altering their spending or reducing their savings.

The biggest impact of rising interest rates on the housing market is the significant reduction in housing sales, which are down by 30% on last year and are likely to remain depressed for some time to come.

But rising rates do not just impact mortgaged homeowners.

JLL estimates that there are up to 500,000 highly leveraged buy-to-let landlords who are particularly feeling the pressure from rising rates.

They are typically passing on the costs in the form of higher rents to private renters who are feeling the crunch and have no other housing options in what is a severely supply constrained rental market.

More than ever before, the UK needs a significant supply-side policy to boost housing construction and ease the pressure.”

Andrew Boyajian, Head of Variable Recurring Payments at Tink, comments:

“The Bank of England’s announcement that interest rates are rising again, paired with the ongoing cost of living crisis, will undoubtedly leave many floundering when it comes to managing finances.

This reality is demonstrated in our latest research, which finds that almost a quarter (23%) of Brits are ‘financially vulnerable’, with the majority (56%) expecting their situation to get worse over the next 12 months. (The research was conducted by Censuswide with 2,010 general consumers in the UK (nat rep) between 17.01.23 and 19.01.23)

Finding ways to financially support the UK’s consumers is crucial.

Leaning on fintech developments such as open banking-powered Variable Recurring Payments (VRPs), may well form part of the answer and play a role in helping people navigate this financially challenging period.

For example, VRPs give consumers more control and visibility of their monthly outgoings as well as greater flexibility over when and how often a recurring payment will occur.

Indeed, VRPs are also enabling users to review and change/ cancel any subscription in a few clicks through their bank app, ensuring maximum transparency and control for consumers.

In the current challenging economic climate, unlocking new ways to help consumers manage their finances should be at the top of the industry’s agenda — particularly now as people look to navigate the associated financial impact that rising interest rates may bring.”

Ben Woolman, Director at Woolbro Group, comments:

“The naive idea that homeowners would simply ‘adjust’ to higher interest rates is now dead in the water.

Mortgagers are instead having to come to terms with the life-changing consequences of this latest rate rise which, for many, will be devastating.

But make no mistake, today’s turmoil has been in the making for many years.

In lieu of building the new homes Britain so desperately needs, the government has instead pandered to ‘Nimbys’ and those who are all but completely opposed to any form of new development.

It is only now, in the run-up to a general election, that it has dawned on the Tories that the housing crisis they themselves have presided over could be their undoing.

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.

While this wouldn’t help struggling mortgagers in the short term, it would prevent local politicians from blocking new housing developments where they are needed most.

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.”

CEO of Octane Capital, Jonathan Samuels, comments:

“As of yet, the Bank of England’s attempts to curb inflation haven’t quite gone to plan and so today’s increase was to be expected.

While a half a percent jump may seem substantial, it should help the Bank of England regain a grip over the situation at hand, as currently, it trails the Federal Reserve and needs to catch up if we want to see inflation fall like it has in the United States.

So all things considered, today’s increase is probably appropriate, although this isn’t the news the nation’s borrowers were hoping for.”

Managing Director of House Buyer Bureau, Chris Hodgkinson, comments:

“So far the UK property market has weathered the storm of twelve consecutive interest rate hikes and while we’ve seen marginal signs of house price depreciation, there’s nothing to suggest a thirteenth increase will bring the walls crashing down around us.

It’s also important to note that a third of homebuyers now own their house outright and so they aren’t feeling the strain of increased borrowing costs.

That said, any base rate increase is sure to be passed on by lenders to the nation’s homebuyers and this is likely to mean higher borrowing costs and fewer available mortgage products.

This will inevitably have an impact on buyer purchasing power and, as a result, we can expect to see more protracted transaction timelines and a further cooling in property values as the market continues to find its feet.”

Managing Director of Sirius Property Finance, Nicholas Christofi, comments:

“Interest rates are now at their highest in over 15 years, but it’s not just the higher cost of borrowing that will be weighing on the minds of UK homebuyers, it’s the consistency at which rates are climbing.

Many buyers are finding that, having agreed a mortgage in principle, the goal posts have already moved by the time they find their ideal home and they’re having to return to the drawing board to reassess just what they can afford to borrow.”

Managing Director of Barrows and Forrester, James Forrester, comments:

“It certainly seems as though the Bank of England has lost its grip on inflation and so they’ve continued to pile more misery onto borrowers with yet another rate increase.

This will do nothing to revitalise what has become a rather weary looking property market in recent months and is sure to dampen buyer demand as lenders pass on this increase in the form of higher mortgage rates.”

Director of Benham and Reeves, Marc von Grundherr, comments:

“The market remains in fairly good form considering interest rates are at their highest since 2008 and we expect this will now bring about a reversal in market fortunes.

The more inflated areas of the market, such as London, largely trailed their more affordable counterparts where pandemic house price growth is concerned.

However, buyers in these regions are better placed to absorb higher borrowing costs and so we expect the likes of the London market to remain largely unfazed going forward.

As a result, we expect stronger market performances to materialise compared to some of the other more affordable areas of the market.”

Jeremy Leaf, north London estate agent and a former RICS residential chairman, comments:

“This latest increase was not unexpected given recent rises in mortgage rates which took the anticipated change in base rates into account – almost a self-fulfilling prophecy.

Wages growing at their fastest in nearly two years has not helped the Bank of England’s deliberations either.

As a result, the green shoots apparent in the housing market at the beginning of the year have started to wilt despite continuing support from strong employment figures.

It seems confidence to buy property will only begin to return when core inflation drops to more sustainable levels over a longer period.”

Marylen Edwards, head of buy-to-let lending at property lender MT Finance, comments:

“Unfortunately, this latest base rate rise comes as no surprise.

While economists had predicted stability by now, global factors – including the protracted negotiations over America’s debt ceiling – are still impacting inflation, while the cost-of-living crisis shows no signs of abating.

These issues, in turn, have impacted Swap rates, furthering the need for an increase.

Once Swap rates start to plateau, this should hopefully bring more confidence to the market among both lenders and borrowers, and bring some much-needed stability.”

Alex Lyle, director of Richmond estate agency Antony Roberts, comments:

“Yet another interest rate rise, coming on the back of so many and with the potential for more to come, creates further uncertainty, which is not good for the housing market.

Although some parts of the country have proven remarkably resilient to increasing interest rates, inevitably this is less the case the higher they go.

This latest rate rise will give those buyers who were anxious anyway an excuse to back out.

Quite a few buyers and sellers are sitting tight until the autumn in the hope that the situation will have settled down by then.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, comments:

“As interest rates hit 5 per cent, the Bank of England should now hit the pause button.

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.

Those on base-rate trackers will find their mortgage rate increase by a further 50 basis points.

A borrower with a £250,000 repayment mortgage on a 25-year term and a pay rate of 4.5 per cent will see that rise to 5 per cent, with monthly payments rising from £1,390 to £1,461.

The cumulation of 13 successive rate rises is significant.

A borrower with a £250,000 mortgage on a tracker pegged at 1 per cent over base rate will have seen their monthly payments rise from £943 in December 2021, when base rate rose from 0.1 per cent to 0.25 per cent, to £1,611 today.

Fixed-rate mortgage pricing continues to edge upwards with many borrowers, particularly those due to come off cheap fixes, in for a real payment shock.

Our advice is to plan ahead as much as possible and take action now.

Rates can be booked up to six months ahead; if when you come to remortgage, rates are cheaper, you can move onto another product.

If you are not due to remortgage for a year or two, start paying down other debt, cut unnecessary spending and consider overpaying on your mortgage if possible to lessen the pain when the time comes.

With so much volatility in the markets, it is more important than ever that borrowers seek advice from a whole-of-market broker.”

Jatin Ondhia, CEO of Shojin, comments:

“Rate-setters have delivered yet another blow today in their relentless battle against inflation, which continues to overpower the Bank of England’s fiscal policy.

With forecasts signalling that further hikes could be on their way, the Bank’s ‘do what it takes’ approach – which has the backing of the Chancellor – will ring alarm bells for many.

Higher borrowing costs will continue to squeeze homeowners and property investors, which in turn will lead to more buy-to-let investors exiting the market and increase rental costs due to a dwindling supply of property.

The impact of this will be felt far and wide. Renters in high-demand areas like London are already spending 40%-50% of their salary on rent.

We can only hope that inflation starts to settle soon, but I expect more pain before relief comes.

Interestingly, property values remain underpinned by a shortage of supply.

In good locations and at the right price point for local markets, cash buyers are still out there, while mortgage buyers are accepting the new norm of higher interest rates and factoring that into their purchasing decisions.

The past decade of ultra-low interest rates and cheap borrowing is well and truly over and we are seeing a return to more “normal” rates, which all borrowers have to get used to.

For existing borrowers, the Chancellor has ruled out direct government assistance but is meeting with banks on Friday to find ways to soften the blow.

Let’s hope they come up with something sensible otherwise we could see an increase in defaults which have so far been muted.”

Adrian Anderson, Director of property finance specialists, Anderson Harris, comments:

“Today’s news that the Bank of England has raised interest rates once again to 5% spells more mortgage misery for millions of homeowners.

There have been some 4 million first time buyers since 2009; a whole generation of homeowners have only ever seen ultra-low mortgage rates and for many, today’s rate rise will force a period of serious lifestyle readjustment.

UK mortgage holders are highly exposed to interest rate risk as our rates are usually very short term (2-5 year fixed for example) compared to the US and Europe who have fixed rates for the duration of the mortgage, some 25 years or more, hence they are able to better budget monthly payments.

42% of homeowners who purchased a property in 2021 took a 2-year fixed rate when mortgage rates were historically at an all-time low.

This is the group of homeowners who are most likely to be hit the hardest.

Compounding this, property prices compared to income are much higher now than they were in 1989/1990.

We are carrying a considerably greater debt these days than 20 years ago hence a rate today of 6% is similar to a mortgage holder paying 13% in 1989/1990.

Some of our clients are genuinely scared about how they will service their mortgage.

Their largest commitment has increased at the same time all other outgoings have increased.

It may feel frightening but don’t stick your head in the sand.

Fixed rates are predicted to continue to increase over the short term so reach out to an independent mortgage broker who can advise based on your circumstances.

If you are concerned about making your monthly mortgage payments, speak to your bank straight away.

Banks have dedicated teams to try and help you through this challenging period.”

Simon Gammon, Managing Partner, Knight Frank Finance, comments:

“It’s been a disappointing week for anybody that needs to refinance this year.

Markets probably require two or three months of meaningful falls in core inflation before swap rates begin to ease and lenders can pass that onto borrowers via lower mortgage rates.

That means it’ll likely be September at the earliest before we see any decent falls in mortgage rates and that may stretch into 2024 if inflation proves particularly stubborn.

Once we do see a couple of positive numbers and swap rates begin to fall, we’re confident that lenders will drop rates quickly.

Mortgage rates have repriced sharply over the past four weeks and we’re hopeful that today’s rise in the base rate is at least partially baked in.”

Tom Bill, head of UK residential research at Knight Frank, comments:

“Inflation has replaced the mini-Budget as the single biggest headache for the UK housing market.

As the financial pain increases for anyone buying or re-mortgaging, it will keep prices in negative territory and a lid on transaction numbers this year.

That said, the wage growth that is driving core inflation higher is one of the reasons we don’t expect a steep decline in house prices.

Record levels of housing equity, the availability of longer mortgage terms, a stable banking system, the political pressure on lenders to show forbearance and the recent popularity of fixed-rate products should prevent a collective cliff-edge moment for the UK housing market.

Meanwhile, rents continue to be forced higher by a lack of supply, which has been exacerbated by a number of landlords selling up in recent years.

A series of tax changes have been politically expedient but economically damaging, with tenants paying the price as a growing number of property owners decide being a landlord no longer stacks up.

Rising rates will only exacerbate this situation this year, and upwards pressure on rents is unlikely to relent any time soon.”

Commenting on the BoE’s decision to raise interest rates by 0.50%, William Marsters, Senior Sales Trader at Saxo UK, comments:

“The Bank of England raises the UK benchmark rate by 0.50% to 5% in a hawkish surprise compared to expectations.

After yesterday’s relentlessly hot inflation numbers the MPC has felt the pressure and voted 7-2 in favor of the 50bps hike.

The Bank guided for further tightening, although language from the prior meeting was unchanged and they said that the scale of inflation increases drove the decision to hike 50 bps.

Terminal rate is still priced near 6%, but the 50bps move gets us a lot closer.

The market’s reaction to the hike initially whipsawed both the Sterling and short dated yields as markets digested the announcement and commentary.

GBPUSD has now settled little unchanged from before the announcement.

This indicates that despite consensus expecting 25bps, perhaps traders had more of an inclination to the larger hike.

The lack of Sterling strength also highlights the concern regarding what these hikes will do to the economy.”