Cost of living: impact of rising interest rates on mortgage loans | Economic news


The banks’ base rate has been raised again in a bid to fight inflation, but this is adding significant costs to borrowers’ bills in the process.

The Bank of England revealed a 0.75 percentage point hike to 3% for its midday base interest rate as major central banks double down on price pressures facing Western economies at the expense of Economic Growth.

Some of the inflationary pressures ahead can be attributed to the mini-budget announced by the Truss government in September, which affected the value of the pound and made imports more expensive.

What was the Bank’s main message today?

Inflation is too high and people are being hit hard, but the rate is expected to drop sharply from mid-2023.

If no action is taken by raising rates, things will get worse.

What are the consequences of an increase in the discount rate?

Action against inflation means that borrowing becomes more expensive.

For example, holders of floating mortgages whose rates are linked to the bank rate face higher monthly payments.

The average increase will be £73.49 per month for follow-on mortgages and £46.22 per month for standard variable rate (SVR) mortgages, according to the representative body of the banking and financial sector UK Finance.

Financial news firm Moneyfacts estimates that a 0.75% increase on a current SVR of 5.86% would add around £2,223 to total repayments over two years (based on a £200,000 mortgage over a period of 25 years).

Should I repair or wait?

Mortgage holders have recently been warned against fixing their rates by experts, who warn that many have little peace of mind as interest rate uncertainty persists and exacerbates the cost of living crisis.

Those looking for new fixed-rate deals still have to pay more than 6% currently for two- and five-year deals due to the post-turmoil spike in the mini-budget market when fixed-rate deals skyrocketed. .

Several lenders have even withdrawn offers until conditions calm down.

But current fixed-rate contract holders won’t feel any pain until their contract expires.

New transaction costs inevitably reflect increases in the discount rate alongside market jitters.

Treasury select committee MPs accused the industry on Wednesday of being slow to pass on the easing in financial conditions seen since the growth plan was largely scrapped.

What do the experts advise?

Moneyfacts finance expert Rachel Springall said it was imperative that those looking to buy a property or refinance their existing home seek independent advice from a broker to navigate the options available to them.

She cautioned against locking in a fixed rate mortgage now, although it may be attractive for those who want peace of mind with their repayments.

“When you get into a new deal will really depend on someone’s situation, especially for first-time buyers who may have trouble building up a deposit and have limited disposable income,” she said. declared.

Why is the Bank increasing my borrowing costs?

It almost seems perverse given the financial hardship inflicted on families, but the Bank is acting to control the pace of price growth.

The Bank cannot control things like soaring energy costs, but it can act to help slow inflation, for example by advocating for wage moderation.

The primary measure of consumer price index (CPI) inflation currently stands at 10.1%.

The Bank now expects the CPI to remain above 10% in the first quarter of 2023 as energy prices continue to climb across Europe, largely due to Russian restrictions on gas exports to the continent. , but this is down from an earlier forecast of 12.5%.

What can I do if I’m having trouble repaying?

Talk to your mortgage lender.

The advice is to contact your lender as soon as possible to discuss the options.

“Lenders are ready to help customers who may be struggling with their mortgage payments, with a range of bespoke assistance available,” a UK Finance spokesperson said.

What about business and personal loans?

It is clear that banks generally require a better rate of return, but it all depends on the financial situation of the client as the risk levels will be different.

If borrowers are paying more, why aren’t savings rates keeping up?

The old saying goes that lenders are quick to punish but slow to pass on benefits.

Given the pace of inflation, savings are indeed eroded.

The majority of the larger high street banks have not passed on higher bank rates to easy-access savings accounts, Ms Springall said.

When will things get better for mortgage rates?

Hopefully soon, but it depends on the mortgage you have.

“I think the good news is that these market prices are now restoring stability. They’re going back to where they were earlier in September. And that should trickle down to the mortgage market,” Bailey said.

The number of mortgages in the market had fallen since the mini budget as the Bank of England reacted and signaled it would raise interest rates to curb inflation. The Bank’s statements have created uncertainty among lenders about the size and timing of the rate hike.

Markets had forecast continued rate hikes of up to 5.25% next year, said David Goebel, associate director of investment strategy at UK wealth manager Evelyn Partners. “But the Bank made clear in its statement today that this was not a likely path, saying the peak in rates would be ‘lower than the price announced in financial markets'”.

The Treasury Committee was disappointed that lenders had not cut rates sooner.

“Lenders don’t want to cut rates too quickly because they’re worried about getting too many applications and not being able to meet their service standards,” said Ray Boulger, senior technical director of mortgages at brokerage John Charcol.

Average two- and five-year fixed mortgage rates have fallen about 0.2% from their recent peak, but still remain above 6%, according to data from Moneyfacts.

Last week, major banks such as Lloyds and NatWest said they expected house prices to fall 7-8% in 2023.

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