1.4 million mortgage holders face paying £7,000 more per year than they did in December 2021
Families are facing a further cost of living squeeze on Thursday with the Bank of England set to hike interest rates for the twelfth consecutive time.
The base rate is widely expected to increase from 4.25 per cent to 4.5 per cent, in the face of subbornly high inflation.
This means further financial pain for 1.4million people on variable mortgages, as they will have seen their monthly payments increase by more than £7,000 a year since December 2021.
Experts are also warning that rates are likely to continue to go up – with a peak of almost 5 per cent possible later this year.
Analyst Laura Suter told i: “Another rate hike is not what the British public want. Many people are either facing re-mortgaging or are trying to get onto the property ladder, meaning another hike in mortgage rates is the last thing they need. We’ve seen the housing market cool in the past month and that will only be exacerbated if rates rise and mortgage lenders either maintain or raise the rates on offer.”
Ms Suter, the head of personal finance at AJ Bell, added: “What’s frustrating for Britons is that there’s no clear path out of this rate hiking cycle and the outlook for rates is changing so quickly it’s hard to keep track of. Currently we’re expecting another one, or possibly two, interest rate hikes after today, with rates peaking near 5 per cent.”
The repeated hikes in interest rates spell the sharpest increase since 1989.
But despite this, inflation has fallen more slowly than the Bank and Treasury had hoped, dropping to 10.1 per cent in March from 10.4 per cent the previous month – well above the 9.2 per cent rate the Bank had forecast in early February.
This means a 0.25 per cent increase tomorrow is likely and will impact the 1.4million people on variable mortgages first, deals that usually sit several percentage points above the base rate.
They now face paying thousands more when compared to December 2021, when the base rate was at a low of 0.1 per cent.
The average price of a home in the UK is currently £290,000. Analysis by i shows that if you have bought a £300,000 property with a 10 per cent deposit of £30,000 on a 25-year mortgage term, those on variables at the predicted 4.5 per cent will have seen their repayments of £911.33 a month increase by £589.22 or £7,070.64 a year when compared to December 2021.
However, those on fixed deals – where the interest rate stays the same for the duration of the deal – will see nothing immediately change from the Bank of England’s decision although they will face a significant increase in their repayments if their deal is close to ending.
Those on fixed rate tariffs will not be affected by any changes to their contract until it comes to an end when they must choose whether to fix again or opt to go on a tracker.
They face a tricky choice as those who fix risk rates going down again, leaving them paying higher monthly payments for longer. However, if they choose a tracker and rates continue to rise, they will be paying more expensive costs until rates come down.
David Hollingworth of brokers L&C said: “Those that are still enjoying a low fixed rate will be looking ahead to what the future may hold. If inflation doesn’t ease back further as was anticipated then we may see further base rate rises becoming necessary.
“Fixed rates have generally stabilised but if further rises look necessary then we could see some upward pressure on fixed rates feed through. Nonetheless rates are significantly better than post mini budget and many will still like to take the shelter of a fix with so much uncertainty.”
Nicholas Mendes of brokers John Charcol told i that customers coming off fixed rate deals on to variables could be as much as halving their rate by switching to cheaper fixes.
“Historically, the conversation we have had with clients is that going on a tracker was one thing to do given where rates were at the backend of last year, whereas now you should be looking to fix.
“We’re not expecting any further decreases in terms of fixed rates, or rates returning to one or two per cent that’s for sure. Trying to second guess when the right moment to fix and for how long will continue to be debated amongst many households, and why now more than ever speaking with a broker who can assess your circumstances can ensure you are making the right decision.”
Last month, despite interest rates having gone up, lenders were still slashing the rates on their fixed deals, because fewer people were applying for home loans and lenders needed to make rates more competitive to secure business.
However, this is no longer the case as more people are seeking out mortgages as sellers are accepting reductions on asking prices. In fact, some lenders have already increased the pricing of their fixed-rate loans already in anticipation of the base rate going up.
Some forecasts are suggesting that the Bank of England base rate could reach a high of 5 per cent later this year, as inflation remains stubbornly high.
If this happened, it would spell further hikes in costs for many mortgage holders. A peak of 5 per cent would mean those on variable mortgages would have seen their monthly payments increase on average by £555.88 a month – equivalent to £6,670 a year – since December 2021.
