How the BoE’s interest rate hike will affect mortgages and property prices

The Bank of England is set to raise interest rates by 50 basis points in August. Photo: Barry Lewis/InPictures via Getty

Britain is on track for the biggest interest rate hike since 1995, with the Bank of England (BoE) typically expected to raise rates by 50 basis points (bps) this month.

Such a move will drive up the cost of mortgages for millions of homeowners as inflation squeezes household incomes.

“Such a move would bring rates down to 1.75% and bring them back to levels not seen since 2008,” said Laura Suter, personal finance manager at AJ Bell. “The environment is very different now, with rates in 2008 being cut following the stock market crash, while they are now being raised to try to stem an inflation boom.”

Read more: Bank of England set to hike UK interest rates to 1.75%

As central bank battles slowing economy, tightening Cost of life crisis and galloping inflation, which reached a 40-year high of 9.4% in Junehere’s how it affects your mortgages and home prices.

Watch: How does inflation affect interest rates?


Threadneedle Street raised rates to 1.25% on June 16 – the fifth consecutive hike since December 2021, when the Bank Rate was just 0.1% – to tame inflation that is nearly five times above its target of 2%.

Analyst says Bank’s decision to raise rates by 50 basis points on August 4 will ‘deepen the misery’ of nearly 2 million people with variable-rate mortgages as they battle rising Cost of life.

Alastair Douglas, CEO of TotallyMoney, said new deals could get more expensive and advised “one in three owners whose fixed rate deal is about to expire” to plan ahead.

“The latest interest rate hike will deal a further blow to the two million mortgage borrowers without a fixed rate deal,” Douglas added. “Reimbursements for an average home are expected to increase by £52, an increase of £196 per month since last autumn.”

Read more: Mortgages harder to get as lenders factor in rising cost of living

Figures show just over a fifth of all UK mortgage holders have a variable rate deal, meaning around 1.9 million homeowners could be affected by a rise in mortgage rates. rate next week.

At present, around 850,000 are on a follow-on agreement and 1.1 million are locked into their lender’s standard variable rate – the highest rate a lender will charge.

According to loan broker TotalMoney and personal finance website Moneycomms for an average UK house costing £270,708, with a loan to value ratio of 75%, a 50 basis point hike could result in mortgage repayments costing £196 per months more than in November 2021.

If the rate increases by 25 basis points, the same mortgage payments will likely increase by £144 per month.

Read more: Mortgage rate rises to slow UK house price growth

UK Finance said the average UK homeowner has mortgage debt of £131,000 ($160,000), meaning those with a follow-on deal could see their mortgage costs rise by £396 a year.

That would leave the 1.9million on a variable rate mortgage with an estimated £752million increase in their annual mortgage bills just from that rate hike alone, AJ Bell estimates.

Aneisha Beveridge, head of research at Hamptons, warned that further rate hikes would put even more pressure on households.

“The magnitude of the growth in house prices and mortgage debt taken on by households means that fairly limited base rate hikes by historical standards have the ability to add significant pressure on the finances of households,” she said.

House price growth fell to lowest rate in 15 months in July.  Photo: PA

House price growth fell to lowest rate in 15 months in July. Photo: PA

House prices

Mortgage experts predict that a 50 basis point hike “could start to put the brakes on recent house price records.”

Michelle Stevens, banking and mortgage expert on personal finance comparison site, said: “Higher-priced mortgages, coupled with the current cost-of-living crisis and a cooling in the post-pandemic the rush to move out, can make homebuyers more reluctant to match or exceed the asking price of a property, or enter into bidding wars with other potential buyers.

Data from real estate website Zoopla points to slowing house price growth as mortgage rates rise and buyers become more cautious.

He said the rhythm of real estate price growth will slow to just 5% by the end of the year, with the average house price in the UK reaching nearly £260,000 in December.

Read more: How Interest Rates Affect UK Mortgages

This represents an increase from the current price of £256,600 that home buyers face to access the property ladder.

Although house price growth has fallen to the lowest rate in 15 months as soaring mortgage rates depress demand, prices are still rising on a yearly basis.

The latest figures from the Nationwide Building Society (NBS.L) showed on Tuesday house price growth hit 11% in July to £207,209a small jump from the 10.7% recorded in June.

However, the year-on-year rise could mask weaker demand from buyers, as the prospect of further interest rate hikes on the horizon could make people think twice about whether they can afford to move.

Read more: Property in the UK: how property prices are changing where you live

Demand was also dampened by the end of the pandemic-era housing boom, spurred by the stamp duty tax exemption, which has since ended.

“Rising mortgage rates will start to impact demand from new buyers,” said Richard Donnell, executive director of research at Zoopla.

Watch: Will UK house prices ever drop?

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