Bank of England raises base rate by 0.5% to 5%, despite worries that a higher rate will damage the property market, the BoE believes getting inflation under control is more important.
The Bank of England (BoE) has raised interest rates by a 0.5% to 5% as it battles to keep the UK’s persistently high inflation under control. Inflation is currently running at 8.7%, down from recent months but far above the BoE’s 2% target. This follows last month’s decision to raise its base rate by 0.25% to 4.5%, the 13th time it has raised them since the beginnig of last year. It expects rates to rise to 4.45% before inflation begins to drop back, reducing to 3.5% by the end of the year.
As thursday’s inflation report from the Official of National Statistics showed, although the economy is expected to grow in the coming months, huge food price increases in particular are driving up the nation’s overall inflation figure. The property industry will see, and has already seen, the direct impact of the bank’s policy with higher mortgage rates for those on variable rate loans, and those coming off fixed rates, undermining home buyer, mover and landlord confidence.
As the BoE’s governor, Andrew Bailey said recently “we know that higher interest rates make things hard for many people too. But we’re conscious that high inflation always hits the least well-off the hardest. Our job is to make sure inflation is low and stable, so we have had to raise rates to bring inflation back down.”
By increasing the cost of borrowing, the BoE has been trying to control soaring inflation, but consumer price index figures released on Wednesday showed that inflation remained at 8.7% in May.
“Having inflation still raging far higher than the UK’s target figure of 2% isn’t great, but the Bank of England not acting fast enough in raising rates by a great enough amount initially has led to where we are now,” Gary Bush, financial adviser at MortgageShop.com, commented.
“Unfortunately, the dogged pursuit of a notional inflation target by the government and Bank of England doesn’t appear to have any degree of patience built in, Within the bigger picture, rather than continuing to hammer the same nail repeatedly, it could be prudent and welcomed for the Bank of England to at least allow some time to assess whether the actions already taken have grasped a reasonable hold or whether the bigger picture does indeed need more hammering and nails to keep it straight, " Ross McMillan, owner and mortgage advisor at Blue Fish Mortgage Solutions, added.
Luke Thompson, director at PAB Wealth Management, agreed, saying that we are now “at a tipping point where the Bank of England really needs to think about what it is doing with interest rates. What they have been doing is having no real effect on the inflation figures, and all they are doing is creating pain for homeowners. I think the Bank of England has handled the whole situation around the base rate terribly. Eighteen months ago, they were telling us the inflation figures were transitory when they clearly weren’t, and they were far too slow to react to inflation when it was starting to run away at the end of 2021.”
UK Finance said the latest 0.5% base rate hike will lead to homeowners paying a monthly average of £47.43 more on their tracker mortgage and £30.28 more on their standard variable rate mortgage.
The trade body reminded those struggling with their mortgage payments to get in touch with their lender to discuss the options available, which may include a part payment plan, a mortgage term extension, a temporary switch to an interest-only mortgage, or a payment concession, including a zero-payment concession, if appropriate.
Industry Action
Ben Beadle - chief executive of the National Residential Landlords Association commented “this will add further pressure on renters and landlords alike. Some 85% of buy to let mortgages are interest only, making them especially hard hit by rising mortgage costs. Some landlords have seen mortgage payments rise by almost 240% since December 2021. Analysis for the NRLA has found that 735,000 rental properties could be lost across the UK if interest rates peaked at five per cent, further exacerbating the supply crisis renters are facing. It makes no sense to have a tax system that discourages investment in the homes renters need, and benefit payments that fail to provide vulnerable tenants with the assurance that they can afford their rents. The Chancellor needs to take urgent action to support the rental market by reintroducing mortgage interest relief in full and unfreezing housing benefit rates.”
And a specialist mortgage broker - Angus Stewart, chief executive of online firm Property Master said “the continued increase in interest rates is causing a perfect storm. George Osborne’s changes to the rules on interest rate relief in 2015 had minimal impact when interest rates were low. However, they are now seriously impacting the profitability of a landlord’s business. Coupled with much tougher affordability rules means that many landlords cannot remortgage at current rent levels leaving them on the lender’s SVR some of which are approaching 10 per cent. They are mortgage prisoners, and the logical option is to sell or substantially increase rent.”
Recent research undertaken of Property Master customers identified 40% of landlords having either recently sold or considering selling one or more properties. Stewart says: “if this came to fruition, the impact would be very significant on tenants and the overall housing market. Recent press talk has been of helping homeowners with the increasing costs of mortgages but it’s important that the Government doesn’t ignore Landlords which are a key source of housing with five million households.”
Matt Thompson, head of sales at Chestertons, says: “we expect the rate rise to have an impact on over-leveraged buy to let investors whose increased mortgage payments could lead to their investment making limited profit or even a loss. This could result in some landlords deciding to offload their assets. At this stage, we haven’t yet encountered homeowners who have been forced to sell up but, if rates continue to rise, some owners may be forced to review the situation and weigh up their options. At the same time, demand for properties in London continues to stay strong as the capital remains a hotspot for a variety of buyer demographics including international buyers.”
And lettings agency Leaders Romans Group has released findings from a survey of landlords of 380 privately rented properties who are registered with LRG brands. It says only 68% definitely plan to maintain their portfolio over the next year.
Rightmove’s mortgage expert Matt smith commented, “our real-time data still shows that more people are sending enquiries to estate agents to view homes for sale than at this time in 2019. We’ve also seen daily visits to our Mortgage in Principle service increase by 53 per cent over the last month as more people look to understand what they can afford to borrow and repay on a mortgage. This indicates to us that for many people right now, higher interest rates are leading them to assess their budgets and what they can afford rather than put their plans on hold.”
Nathan Emerson Chief Executive for Propertymark, says “it’s undisputed that homeowners and first steppers will be facing the consequences of rising interest rates as borrowing costs increase. However, with this comes a further shift towards more realistic and sustainable house prices down from the spike seen during the pandemic. Confidence from sellers is undeterred with our latest data showing a 70% increase in properties available for sale compared to April 2022 and in turn, this is providing buyers more room for negotiation as well as more choice.”
Dominic Agace Chief Executive of leading estate agency Winkworth, said "these rises will undoubtedly cause stress to homeowners even though they have remained within the mortgage stress tests since 2015. The market is delicately balanced, having surprised so far this year in terms of positive levels of activity. With the structure of the mortgage market, we expect the impact to feed through slowly, averting any significant price falls as a result, with pipelines remaining intact as buyers seek to ensure they keep their existing mortgage offer rather than challenge the pricing. Continuing lack of supply and rent increases will continue to support the case to buy where affordability allows.”
Jason Tebb, Chief Executive Officer of OnTheMarket.com said "this latest base rate rise was widely expected by the money markets as the Bank of England battles to curb the stubborn level of inflation, holding at 8.7% in May, but the 50 basis-point increase, taking rates to 5%, is perhaps more aggressive than many had hoped for. The 13th rate rise in as many meetings will further exacerbate increasingly stretched affordability and is set to have a negative impact on the confidence of the average property seeker relying on a mortgage.”
Rightmove’s mortgage expert Matt smith adds, “Yesterday’s inflation figures were disappointing, however today’s Base Rate rise won’t come as much of a shock to lenders who have already been increasing their fixed-rate mortgages sharply in anticipation of today’s rise. The Bank appears to have opted for a larger Base Rate rise this month than some commentators predicted to try and address the underlying issues driving inflation, and it continues to forecast that inflation will drop sharply in the second half of the year.”
Consumer champion Martin Lewis has given his verdict on the Bank of England’s decision to raise interest rates by 0.5%, spelling further pain for mortgage holders. The central bank’s base rate now sits at 5%, after its monetary policy committee opted for its 13th consecutive hike since March 2020, as Bank officials seek to tame decades-high levels of inflation. While markets had been bracing for a base rate rise of 0.25%, fears of a more severe hike were heightened on Wednesday after official figures showed inflation had failed to fall – while, worryingly, core inflation – which excludes food and energy – hit a 31-year high.
Mr Lewis, who met Chancellor Jeremy Hunt on Wednesday ahead of the announcement, had already warned that a mortgages “timebomb” had now “exploded” in the UK. Following the Bank’s decision, the MoneySavingExpert founder said: “It's very hard to know how to react to a 0.5% increase in rates at this time. Clearly, we must tackle inflation, but this one trick method is causing huge pain to many on variable [deals] and coming off fixed-rate mortgages.”
He called on people to “spare a thought for mortgage prisoners who've been paying over the odds for 15 years”, adding: “Many will now have totally unaffordable 9% mortgages. Help for them is desperately needed.”
Housing market reeling after BoE hike interest rates in fresh blow for mortgage holders
Prospective buyers and homeowners looking to reinstate fixed rate or tracker deals on their homes were met with a fresh blow this afternoon following the central bank’s decision to hike interest rates for the 13th time in a row in efforts to cool soaring inflation.
It is expected that the decision will lead high street lenders to further raise the rates on the deals they offer. Just last week, HSBC pushed mortgage rates up twice in one week in an unprecedented move for the high street bank, as it navigated news that that the central bank would keep interest rates high.
On Tuesday, fellow lender TSB also pressed pause on the sale of some of its mortgages, temporarily removing two-, three- and five-year fixed deals. “More mortgage rates increases will eventually slide us into recession, which may be the plan if there is one in place. Its time for the government to take clear action on its own issues and prices, this is not a global problem anymore. The base rate has become the stick to beat the economy with, not to improve it. News of the interest rates comes amid a challenging time for the market, with house price growth also showing signs of slowing down. Recent figures showed UK house prices rose by 3.5% in the 12 months to April 2023, down from a 4.1% increase the previous month" said Justin Moy, managing director at EHF Mortgages, told City A.M.
Simon Gammon, managing partner at Knight Frank Finance, said.“it’s been a disappointing week for anybody that needs to refinance this year. Markets probably require two or three months of meaningful falls in core inflation before swap rates begin to ease and lenders can pass that onto borrowers via lower mortgage rates, the markets may have to wait until September to see any “decent falls” in mortgage rates, but warned it may stretch into 2024 if inflation proves particularly stubborn. Once we do see a couple of positive numbers and swap rates begin to fall, we’re confident that lenders will drop rates quickly.”
Why did the Bank of England hike the Base Rate so aggressively?
Leading estate agent cases a critical eye over yesterday's decision to raise the base rate by half-a-percent to 5%. Why did the Bank of England (BoE) increase Interest Rates to ½% rather than ¼%, which would have been kinder to the Economy?
I think the BoE panel were over-reacting to their failure a few years ago to increase the cost of money and thereby allowing a loose monetary system for as long as they did, resulting in the present hyper-inflation environment.
They could have gone up by a ¼% and given themselves more headroom to squeeze again in the forthcoming months and I would suggest that 51/2-6% could well be the top of the cycle.
In the past, before the advent of long-term fixed rate mortgages, any tightening of the interest rate level would have had an immediate effect on consumer demand. But today there is a considerable lag between cause and effect as illustrated by the stubbornly persistent inflation rate, which is still much higher than either the BoE or the Prime Minister would like most.
Rishi Sunak promised to half the rate of inflation during this year, which looks like a fanciful aspiration at the moment.”
It can’t be much fun for mortgagors on a variable rate to pay circa 6% when hitherto they may have been paying 1%, 1.5% or 2%. This sucks 4% from consumer spending which is exacerbated by higher energy costs, even though they are dropping of late. Food inflation is also stubbornly high. I wonder, with oil price, commodities, shipping costs all moving south, if the opportunists in the food supply and retailing sectors are not having a field day.
There is still very little sign of a significant increase in supply of properties for sale, particularly in the middle to upper markets, which means that underlying values will still not change much despite the higher cost of borrowing. The value of homes at the lower end will inevitably drop as the credit squeeze gets worse, and if this is the case, Christmas could come early for the first time buyers, who will benefit from a value reduction even though the cost of borrowing will temporarily be higher than they would like.
Mortgages: Banks promise more protection as mortgage rates soar
Banks and building societies will offer more flexibility to struggling mortgage-holders as rates soar. The move comes after bank bosses met the chancellor, Jeremy Hunt, in Downing Street on Friday.
Borrowers will be able to make a temporary change to their mortgage terms, then will be able to return to their original deal within six months. This would allow some to have lower repayments for a short time, by just paying the interest on the home loan.
Mr Hunt said the six-month flexibility on switching terms would not affect credit scores as it may have done previously. However, it will still be the case that missing payments or taking a total break on payments, known as a mortgage holiday, will still harm someone's ability to borrow in the future.
Lenders also agreed to a 12-month delay before taking repossession proceedings against borrowers unable, or unwilling, to pay over the long term. Bank chief executives described it as a "productive" meeting as they left Downing Street. Earlier last week, the Labour Party issued a five point plan which it said would ease what it called "the Tory mortgage penalty" and help limit repossessions.
Shadow chancellor Rachel Reeves called the chancellor's latest statement "a weak response. Questions remain on how voluntary these measures are, the government must offer clarity and confidence to homeowners by putting in place requirements now to reassure households."
The meeting between lenders and Mr Hunt comes after Thursday's shock decision by the Bank of England to raise interest rates to 5%, up from 4.5%, as it tries to tackle inflation. Millions of UK households will see their budgets squeezed as a result.
The post-meeting announcement was never going to lead to direct government intervention to help those who are struggling, but it will kick-start a campaign to make them aware of their options.
The idea is it encourages people to talk to their lender if they are in trouble, without feeling there are financial barriers in place to do so. Mr Hunt said, "these measures should offer comfort to those who are anxious about high interest rates and support for those who do get into difficulty."
Mortgage lenders ‘ready to support customers’ as rates jump again
Mortgage lenders said they are ready to support customers, as the Bank of England base rate rose for the 13th time in a row, pushing up some borrowers’ costs by hundreds of pounds more per year. Homeowners whose mortgages directly track the base rate will see their monthly payments jump by around £47 on average as a result of Thursday’s unexpectedly steep rate hike from 4.5% to 5%.
Trade association UK Finance said the average tracker mortgage payment will increase by £47.43 per month, adding up to £569.16 annually. Taking all 13 base rate rises into account, the average monthly tracker mortgage payment will have increased by £464.79 – adding up to average tracker mortgage payment increases of £5,577.48 annually.
David Postings, chief executive of UK Finance, said, “lenders are ready to support customers who are feeling the strain from the rising cost of living. Over 80% of homeowners are on fixed-rate deals and will be protected from any immediate rise in mortgage repayments following the bank rate increase."
Lenders are ready to support customers who are feeling the strain from the rising cost of living
David Postings, UK Finance said, “those customers who are due to come off their fixed rates later this year are, however, likely to face higher monthly repayments. Lenders are prepared to help anyone struggling with their mortgage payments. If you are worried about your finances, do get in touch with your lender early to discuss the options available. They have teams of experienced and understanding advisers who will develop a solution tailored to your individual circumstances. Making a call to your lender to discuss the options available will not impact your credit score. Importantly, the level of homeowners in arrears remains low, meaning that most households are able to keep up with their monthly payments.”
While fixed-rate mortgage borrowers will not see an immediate change in their monthly payments as a result of Thursday’s base rate hike, around 2.4 million fixed-rate deals are due to end between now and the end of 2024. According to Moneyfactscompare.co.uk, the average two-year fixed residential mortgage rate on Thursday morning was 6.19%, while the average five-year fixed-rate mortgage was 5.82%.
In total, there are 8.5 million homeowner mortgages outstanding, according to UK Finance. Around 639,000 of these are tracker mortgages and 773,000 are standard variable rate (SVR) mortgages. Borrowers end up on an SVR when their initial deal ends. SVRs are set by lenders individually, although these loans often roughly follow movements in the base rate.
If lenders choose to pass on the latest base rate rise in full, this would add £30.28 to the average monthly SVR payment, adding up to an annual increase of £363.36. An SVR mortgage holder who has had all 13 rate rises fully passed onto them faces paying £296.76 more per month in total, on average, adding up to a £3,561.12 annual payment increase.
Consumers looking to remortgage may find it difficult to afford higher interest rates, so seeking independent advice is essential
Rachel Springall, a finance expert at Moneyfactscompare.co.uk, said “amid a cost-of-living crisis, rising interest rates can have a devastating impact on borrowers who are already struggling to cover their monthly essentials and could well lead to a rise of ‘mortgage prisoners. Those borrowers who are still on a competitive fixed-rate deal for a few more years may want to consider overpaying their mortgage to reduce the size of their loan. Affordability remains a key concern for any borrower, some first-time buyers may put their plans to jump onto the property ladder on hold in hopes the housing supply shortage will improve and interest rate volatility calms. It is imperative new buyers can comfortably build a large enough deposit and meet their mortgage repayments, which may be challenging to meet if they have limited disposable income. Consumers looking to remortgage may find it difficult to afford higher interest rates, so seeking independent advice is essential to consider every option available to them, such as downsizing.”
Speaking at a press conference in July last year, Sir Jon Cunliffe, the Bank of England’s deputy governor, financial stability, said “I think I’d say the proportion of households who could get into real stress on their repayments, it’s normally when repayments are about 40% of your income, is a number we always watch very carefully and we always look to see what interest rate increases will be needed to take that share back to historically high levels, levels we’ve seen in the past, 2.7% was the highest we saw before the financial crisis.”
He said back in 2022: “Of course, there’s great uncertainty about what will happen… but as it stands now, on the basis of the Monetary Policy Committee’s forecasts on market interest rates, we don’t see that share rising that much this year. We see it rising further next year. That’s about debt distress…”
Asked what level the bank rate would have to reach for debt servicing ratios or mortgage debt to return to pre-financial crisis levels, he said previously: “I think the market’s got interest rates going to nigh-on 3%, you’d be looking at five to seven to eight on the corporate side. The picture is not that dissimilar on the mortgage market side because again, you’ve got mortgage market, consumer debt and you have got this question of how it comes through over time.”