Mortgages could increase by £3,300 a year for a million UK households as rates set to rise again

Up to a million households face another hike in mortgage costs if the Bank of England increases interest rates again this week.

The Bank of England Monetary Policy Committee (MPC) will meet on Thursday and is widely expected to raise rates by another 0.5 per cent to 4 per cent.

The rise will mean around a million mortgage holders who are set to come to the end of record low fixed rate deals this year face an increase in annual repayments of thousands of pounds.

There are also warnings that homeowners will see further dramatic falls in the value of their properties as mortgages become increasingly unaffordable.

A household with an average mortgage debt of around £138,000 who agreed a fixed-term deal of around 1.5 per cent during the period of historically low rates would see their monthly mortgage repayments rise from £552 to £827, or £3,300 more each year.

While the official Bank of England interest rate is 3.5 per cent, the average fixed-term rate is around 4.75 per cent for a two- or three-year deal.

These deals are likely to rise to at least 5.25 per cent if the Bank of England does raise rates by another 0.5 percentage points.

Around one million mortgage holders are expected to come off low fixed-rate deals this year, leading to concerns of a rise in repossessions and a slump in house prices.

The Bank has been raising rates successively for more than a year. In December 2021 the base rate stood at just 0.1 per cent as the policymakers tried to encourage consumer spending after Covid slowed down the economy.

Many mortgage holders have not felt the immediate effects of interest rates rising due to being on a fixed-rate mortgage deal, but they will see their costs increase when their current deal comes to an end.

According to the Resolution Foundation, only around 4 per cent of mortgage holders are currently behind with their payments, but this is expected to increase as the one million households set to come of long-term deals account for more than 10 per cent of the 9.3 million people with mortgages in the UK.

A further interest rate rise will also hit those with other forms of lending, such as those with outstanding amounts on credit cards.

According to The Money Charity, the average level of household credit card debt has risen 7.22 per cent in 2022 to around £2,252.

However, there may be some respite for those struggling with the rising cost of lending coming in the next few months.

Some experts expect this week’s interest rate will be the penultimate base rate rise before rates peak at 4.5 per cent or 4.25 per cent, before beginning to fall back down as inflation comes under control.

Deutsche Bank even suggested that this Thursday would mark the MPC’s final “forceful” hike in the tightening cycle with a 0.5 percentage point increase.

The need to “go big” is because of several factors, including that wage growth has beaten expectations, indicating consumers still have some spending power and that prices are still historically elevated, Deutsche added.

Societe Generale Global Economics suggested the same rise this week, but added that it expects another 0.5 percentage point hike in March before coming back down.

The SocGen economists said: “Even though the outlook is less gloomy than expected only three months ago, we still think a recession is likely and the MPC’s forecasts should continue to predict one for this year.

“This, and the mounting evidence of some cooling in the labour market, vacancies and job growth in particular, should lead the committee to contemplate an imminent end to tightening.”

Investec Economics, on the other hand, anticipated a smaller rate hike that would take it to 3.75 per cent on Thursday, before peaking at 4 per cent in March.

“Recent weeks have ushered in a greater sense of economic optimism,” Philip Shaw, chief economist at Investec said.