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Bank’s latest interest rate hike biggest in 27 years – industry reaction

The Bank of England has increased the base rate by 0.5% yesterday, the highest it has been since 2009 and biggest incremental hike since 1995.

The Negotiator

Bank of England image

The Bank of England has increased the base rate y 0.5% yesterday, the highest it has been since 2009 and biggest incremental hike since 1995, when rates were at 6%.

The BoE benchmark rate now stands at 1.75%. The pound slumped on the news and the BoE warned of a long recession, as it fights inflationary pressures. The rise signals a historic shift from the fiscal stimulation of the economy over the last ten years, to a tightening of monetary policy.

The effect on mortgage payments as the interest rate creeps up could have a significant effect on the market and people’s ability to pay existing mortgages and afford new loans.

Around 75% of current mortgages are on a fixed rate of between two and five years, so the effect across the country will be delayed. Although when it comes it will cause a significant shock to household finances. The average house price is currently around 8 times average earnings, versus 4 times at the turn of the century.

The two million or so borrowers on variable rates are already feeling the pain, adding to the cost of living crisis.

INDUSTRY REACTION
Iain Mckenzie image

Iain Mckenzie, Guild of Property Professionals

Iain McKenzie, CEO of The Guild of Property Professionals: “These decisions could also affect house prices in the coming months. Over the last two years, we have seen unprecedented demand for property, which is in large part due to the ultra-low interest rates that have made getting a mortgage easier.”

image of Jason Tebb OTM

Jason Tebb, CEO, OnTheMarket

Jason Tebb, Chief Executive Officer of OnTheMarket: “As long as buyers remain confident about obtaining the mortgages they need and being able to afford them, increases in rates, while unwelcome, are unlikely to result in a slamming on of the brakes. Even with this half-point rise, it is still a comparatively cheap time to borrow money; in a few months’ time, the picture could be very different.”

John Phillips Just Mortgages image

John Phillips, Just Mortgages

John Phillips, National Operations Director at Just Mortgages: “As mortgage rates rise, feedback from our network of brokers across the country reveals that they are working overtime to secure the lowest deal for clients before rates rise further and lending criteria tightens which will be exacerbated by this latest rise.

Borrowers are confident in the value of their homes but they are becoming increasingly nervous.”

“There is no doubt that borrowers are confident in the value of their homes but they are becoming increasingly nervous about the impact of fuel, food and energy price rises on lenders affordability criteria.”

RATES DOUBLED
France McDonald Savills

Frances McDonald, Savills

Frances McDonald, Associate Director, Residential Research Savills: “The five base rate rises we have already seen over the last six months have caused a significant increase in the cost of mortgage debt. For someone borrowing a 75% mortgage, the average quoted 2-year fixed rate more than doubled over the year, from 1.39% in June 2021 to 2.88% in June 2022.

“Although these rate rises will have the greatest impact on new entrants to the market and those on variable or tracker mortgages, they will also affect those wanting to trade up the housing ladder, particularly given the strong price growth we’ve seen of late, unless we see lenders absorbing some of the increases.

“Changes to mortgage affordability criteria which came into effect on Monday should create greater capacity for house price growth in the medium term.”

Some homeowners who are nearing the end of their terms are facing a shock when they come to refinance.”

Simon Gammon, Knight Frank Finance

Simon Gammon, Knight Frank Finance

Simon Gammon, Managing Partner, Knight Frank Finance: “We’re seeing two significant impacts on borrowers. Firstly, some homeowners who are nearing the end of their terms are facing a shock when they come to refinance, because they are unable to borrow as much as they hoped.

“Secondly, those who are looking to buy are realising once obtainable properties are now out of reach. The question for them is now not “how much can I borrow?” but “how much can I afford to borrow?”. This is a subtle but very important shift in borrower behaviour.”

 

August 4, 2022

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