As was widely predicted, the Bank of England (BoE) raised interest rates by half a percentage point to 5% on Thursday in its ongoing attempts to reduce inflation, which now stands at 8.7% after not dropping as expected.
While the CPI (consumer price index) for inflation dropped into single figures in April, it has stayed there; plus the base inflation rate has risen to 7.1%, its highest level for more than 30 years.
It spells higher payments for mortgage holders, with experts predicting interest rates could rise as high as 6% this year.
The Chancellor Jeremy Hunt has met with mortgage lenders and agreed a deal that people will get a 12-month grace period if they can’t pay their mortgage, before any repossession proceedings start. This is not currently binding on the whole industry or a legal requirement, however.
According to national mortgage broker L&C, an estimated 773,000 people on standard variable rate (SVR) mortgages are facing rates of 7.5% and above.
Lender trade body UK Finance has said the interest rates increase is likely to have added £30.28 to monthly repayments (£363 a year), bringing the overall hike since December 2021 to almost £300 a month, or an extra £3,561 per year.
Those on tracker rates – which rise and fall depending on the interest rate level – have seen monthly repayments go up by an average of £47.43 per month (£570 a year) following the latest decision. The organisation calculates that monthly repayments are now £465 per month (£5,577 a year) higher than in December 2021.
Those locked into fixed rate of interest mortgages may be hoping they can weather the storm before their current deal expires.
News of the anticipated rise had already pushed fixed rate deals higher before Thursday as lenders reacted to the forecasts, with the average two-year fixed mortgage rate rising from 5.34% in May to 6.15% by last Wednesday.
It is also not good news for anyone approaching the end of a fixed rate deal, who could easily face monthly mortgage interest payments doubling or even tripling if they had been enjoying a low 2% rate.
Anyone whose fixed rate deal is ending is advised to explore their options as soon as possible.
Compare the rates of your current lender with other market options, and be prepared to swap to a new rate if appropriate.
Financial institutions have urged anyone struggling to pay their mortgage to speak to them as soon as possible, because they say there are a number of options available.
These may include switching from repayment to interest-only terms and/or extending the repayment term.
People tend to forget the current ‘high’ interest rates are not when compared with historical numbers – for more than a decade we had become used to ultra-low rates averaging 0.5% and indeed dropping to 0.1% in 2020.
Interest rates were 17% in 1979 and remained high through the 1980s, swinging from around 9% to 14%. During most of the 1990s, 5 to 7% was the norm and the rate didn’t drop below 5% for a sustained period until 2008.
Nothing is certain, but experts are generally predicting interest and inflation rates will begin to fall towards the end of this year.
