This is the largest single increase in the base rate for 33 years, and is designed to curb the sky-high CPI inflation rate, which stood at 8.8% as of September.
High street banks should not pass on higher fixed rates to mortgage borrowers, Bank of England Governor Andrew Bailey has warned, despite the central bank raising rates at its fastest level in three decades. Mr Bailey said although the Bank Rate had risen by 0.75% points to 3% this “should not lead to higher mortgage rates” for consumers.
He added: “Actually I think there is a downside to mortgage rates.”
Although variable-rate mortgages, which are generally pegged to the Bank Rate, will rise immediately, early signs suggested that banks would not raise prices on fixed-rate deals, despite the largest interest rate rise since Black Wednesday in 1992. No lenders announced fixed-rate rises in the immediate aftermath of the Bank's decision, brokers said.
Some lenders are even cutting their rates. HSBC on Thursday reduced rates on a selection of its fixed-rate mortgages by up to 0.29% points. MPowered Mortgages, a smaller lender, reduced some of its fixed deals by up to 0.76% points.
Brokers have complained that fixed-rate mortgages were already overpriced as swap rates, which determine banks’ borrowing costs, have fallen steadily since the majority of the mini-Budget was scrapped and Rishi Sunak replaced Liz Truss as Prime Minister.
Experts now predict that fixed-rates will stay at this level or fall slightly, instead of rising in response to the Bank Rate increase. Last week, the average rate for a two-year fixed-rate mortgage dipped slightly to 6.46%, according to Moneyfacts, a data company. This was down from 6.47% recorded on the previous day before the interest hike even though the Bank of England’s 0.75% point rise was widely anticipated.
Average rates on two-year fixes were down 0.19% points from their peak of 6.65%on October 20. The average rate on a five-year fix on Thursday was 6.3%, down from a peak of 6.51% over the same period.
Mark Harris, of mortgage broker SPF Private Clients, said that as gilt yields and swap rates fall, banks would be keen to take on new business.
“Lender appetite and competitiveness may also increase as activity falls, adding further impetus to recent rate reductions,” he said.
This was despite the fact that the number of residential mortgage deals on the market hit its highest level since the mini-Budget. Banks withdrew 43% of all deals after the mini-Budget on September 23. The number of deals has bounced back to about a fifth below the pre-mini-Budget level as lenders relaunched mortgages at higher rates, but the number then plateaued for several weeks.
In the last few days, the number of deals has started to increase slowly again. Experts said this was a clear sign that lenders feel they have more certainty around pricing.
On Thursday morning, there were 3,171 available residential deals on the market, according to Moneyfacts. This was a 4% rise since last Wednesday.
Jeni Browne of Mortgages for Business, a specialist broker, said: “Rishi Sunak and Jeremy Hunt’s appointments and subsequent actions have been met with approval by the money markets which has meant that swaps have started to ease down. So while the Bank Rate rises, we are expecting fixed rates to come down slightly over the coming weeks.”
Moubin Faizullah Khan, of GetGround, a buy-to-let adviser, said that if Mr Hunt is able to calm the markets further with his fiscal statement on November 17, swap rates are likely to fall further. In turn, this would bring down fixed-rate mortgage costs in the new year, he said.
Simon Lambert, editor of This Is Money, said: ‘Research from BuiltPlace that adjusted for housing affordability has shown that base rate at 6% today would be the equivalent of the double-digit rates of the late 1980s and early 1990s.
The sliver of good news for today’s homeowners is that both the Bank of England and markets now forecast that base rate will not rise quite as high as previously expected, peaking below 5% rather than above it.
The announcement is worrying news for first-time buyers looking to get onto the property ladder.
Mr Lambert explained: ‘The base rate rise will particularly worry the younger generation of homeowners who have had to take large mortgages to get on the ladder in this era of very high house prices.
‘House prices are more expensive compared to average wages than they have ever been and this has led to borrowers taking on considerably bigger mortgages compared to their salaries than their parents’ generation did – enabled by record low interest rates.
‘Now that interest rates have started to rise much faster than anyone expected, mortgage rates have jumped substantially and this is having a hefty impact on people’s finances.’
The Bank of England governor Andrew Bailey warned it was a ‘tough road ahead’ for the UK and households.
He also acknowledged the fact eight rate rises since last December are ‘big changes and they have a real impact on peoples’ lives’.
Rightmove’s director of property science Tim Bannister says: “The era of historically low interest rates looks to be over, which is making it more challenging for those new first-time buyers who are stretching themselves financially to try and get out of the frenzied rental market and onto the housing ladder. However, compared to the volatility of a few weeks ago, mortgage rates have now started to stabilise and fall. As today’s rise was expected, we don’t think we’ll see any significant changes to new fixed rate deals based solely on today’s interest rate rise.
“Mortgage payments will be much more manageable for those first-time buyers who have been lucky enough to save up a bigger deposit of 25%, as they may find that monthly mortgage payments on a typical first-time buyer home are lower than their current monthly rental payments.
“It’s important to look beyond the headline numbers, because, while ‘like-for-like’ mortgage costs have been increasing, mortgage brokers and lenders will be able to help people assess the different options available to manage their costs and see if they can afford to move.”
“We were already seeing activity soften in the market since the start of the summer as rising interest rates and the cost of living combined to make it more expensive to move. Along with the political uncertainty, the sharp rise in rates has had an impact on people’s plans and demand for homes, and a number of people are choosing to wait and see what unfolds over the next few weeks and months.
“But there are thousands of different local housing markets, and various groups of people in different circumstances. Those in a fortunate position to have built up reasonable equity in their home, or who are cash buyers, appear to be carrying on with their plans to move, while those stretching themselves unfortunately may have to press the pause button for now.
“It’s worth remembering that buying a home is likely to be the biggest purchase that someone makes, and what we’re hearing from agents is that people are taking a medium to long term view when weighing up if now is a good time to move. If they know they can afford the mortgage payments and they’ve found a home they love, then they’re determined to try and make it work.”