Mortgage timebomb fears after shock Bank of England interest rate hike

For Christian Gordine, memories of the Covid pandemic are bitter-sweet.

While restrictions were placed on the public, he and a friend finally, after years of toiling and saving, managed to achieve their dream of getting on the property ladder.

But he, like millions of other homeowners across the country, is sitting on top of the mortgage ticking time bomb, waiting for his monthly payments to explode.

My colleagues Matt Mathers and Maryam Zakir-Hussain have the full report:

Our political correspondent Adam Forrest reports:

Dr Luciano Rispoli, senior economics lecturer at the University of Surrey, said the interest rate hike would “hit us like a giant wave – ultimately plunging the UK economy into a recession.”

Luke Bartholomew of investment giant abrdn said the 0.5 per cent hike would be a “milestone” on the road to an inevitable recession. The economist said going up by 0.5 per cent meant the Bank risked “looking panicked and increase uncertainty”.

Julian Jessop of the Institute of Economic Affairs think tank, said the Bank of England’s “policy mistakes, forecast errors and communication blunders” meant it had no choice left but to go for a large increase in the base rate.

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.

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.”

She continued: “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.”

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.

“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.”

Rishi Sunak has vowed the government will “remain steadfast” in its course to bring down inflation.

Speaking at the Times CEO summit in London, the Prime Minister said: “The reason interest rates are going up is because inflation is too high and we’ve got to bring it down.

“This is something that makes everybody poorer, that’s what inflation does.

“That’s why we’ve got to grip it, we’ve got to reduce it and interest rates are a part of that.

“Now, I always said this would be hard – and clearly it’s got harder over the past few months – but it’s important that we do do that.

“The Government is going to remain steadfast in its course and stick to its plan to do that.”

The central bank’s base rate now sits at 5 per cent, 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 per cent, 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.

A defiant chancellor Jeremy Hunt has said that “if you stick to your guns, you bring inflation down”.

The chancellor said the “single most important thing any government can do is be responsible with public spending”, vowing to avoid “unnecessary borrowing”.

Ruling out direct support to mortgage holders, Hunt said: “Nor, sadly, can we offer short-term mortgage support if it means inflation stays higher for longer. It would be self-defeating.”

He added: “If you look at what’s happening in other countries, you can see that rises in interest rates do bring down inflation over time. That will happen here. But we need to be patient. If we stick to the plan, we’ll get to the other side.”

Sir Keir Starmer warned that “next month it’s going to feel a lot worse” for millions of homeowners.

The Labour leader said that he will personally be affected by the expected interest rate rise.

Speaking just ahead of the announcement, he said: “Within an hour now just across the river, the Bank of England will take a decision that will underline with emphasis the reality of where we stand as a nation, and also the fact that we now live in a new economic era,” Sir Keir told the Times CEO summit in London.

Asked whether the expected rate hike will affect his household, he said: “Yes, it will affect our mortgage, it has already affected our mortgage in the last 12 months. So we will see that go up.”

He said that will be a “shared experience” and that it is “a real problem” for those struggling to make ends meet.

“Next month is going to feel a lot worse than it feels now, and as many people have said to me, if you’ve got only the mortgage going up, that might be bearable, but it’s alongside the energy bills going up, the food bill going up.”

Shadow chancellor Rachel Reeves accused Jeremy Hunt and Rishi Sunak of “burying their heads in the sand” about the mortgage misery facing householders.

“Families across Britain will be desperately worried about what today’s interest rate rise might mean for them,” she said.

“They want to know that support will be there if they need it.

“Instead, the Chancellor and Prime Minister are burying their heads in the sand and failing to clean up the mess this Tory government has made.”

Responding to the interest rate rise, chancellor Jeremy Hunt said: “High inflation is a destabilising force eating into pay cheques and slowing growth.

“Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down.

“Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later.”