Bank of England raises interest rate by 0.5% to 2.25%

The Bank of England has raised its base rate by 0.5% to 2.25% up from 1.75% to its highest level in 14 years, despite speculation that the rate would go up 0.75%

The rate went up by half a percentage point in August, which was the biggest jump in 27 years.

Inflation is currently 9.9%, which is the highest level in nearly 40 years. Chancellor Kwasi Kwarteng is to deliver a mini-Budget tomorrow, which may include a cut in stamp duty.

The effect on mortgage payments as the interest rate goes up could have a significant impact on the housing market, with 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 will now be feeling the pain, adding to the cost of living crisis.

Industry reaction

Nathan Emerson, CEO of trade body Propertymark, says: “Recent rises have been so widely spoken about that this has fed directly into consumer sentiment and has left some people uneasy about moving home, but those looking to enter the market should not be spooked by this.

“Despite increases, the majority of buyers and sellers are taking advantage of the cooling off in house prices and the slight easing in competition, and they continue to enter a strong and healthy market.”

Dominic Agace, chief executive of Winkworth, says: “With so much noise around the trajectory and uncertainty in  the interest rate and inflation balance going forward, it’s important to reflect that these are still historic lows, with interest rates at 5.75% as recently as 2007.

“Undoubtedly, each rise takes some zest out of the market, albeit there is some room to go before any danger of a reversal in market trends. What the big question this time is, what will the end balance be now Trussonomics has entered the equation, with a proposed stamp duty cut. We must ensure there is a balance between home economics and Trussonomics. “What we do know is there is a desire to move home and what seemed a negative outlook for 2023 is becoming more benign for the housing market.”

Simon Gammon, managing partner at Knight Frank Finance, says: “Today’s hike further increases the likelihood we will see further increases in mortgage rates during the months ahead.

“Headline five-year fixed rates sat at 1% as recently as December. Now you’ll be lucky to find any five-year money lower than 3.5%. If pricing in financial markets turns out to be correct and we do see the base rate reaching 4% around the middle of next year, we’d expect the best five-year products to be around 5.35%, which will be a shock for borrowers rolling off two-year deals.”

Tim Bannister, Rightmove Housing Expert, says: “Although the majority of people are on fixed rate mortgages, there’s a looming concern for those with their terms due to end over the next six months or so as interest rates continue to creep up.

“It’s likely that those who choose to fix again will find that rates have doubled in some cases since they last locked in, and so despite paying down some of their debt they could find their new monthly mortgage payments are higher, even if they’ve moved into a lower LTV bracket and have built up equity.

“They will now face the tough decision of moving to a tracker mortgage in the hope that interest rates drop again soon, or taking another fixed deal for a bit more certainty on their outgoings.”

John Phillips, national operations director at Just Mortgages, says: “Our brokers across the country tell us that remortgage business is continuing to gain momentum and with interest rates rising to 2008 levels, and with no sign of stopping, it’s easy to see why. Although house price growth is robust with year-on-year growth in excess of 15% borrowers are looking to secure an affordable rate rather than release equity in their homes.

“Rising house prices do offer something of an equity-based safety net to homeowners, but this is often just a value ‘on paper’, and affordable and sustainable monthly payments is far higher on the list of household priorities.”

Highest in 14 years

Avinav Nigam, cofounder of real estate investment platform IMMO, says: “Hiking interest rates is one way to curb spiralling inflation by reducing consumer demand. However, it has a severe impact on mortgages, as the rate of borrowing climbs even higher. Coupled with the affordability crisis, this will make owning a property even more out of reach.

“It most significantly impacts the circa 900,000 borrowers on variable-rate mortgages, as well as the 1.1 million on standard variable rates.”

Tomer Aboody, director of property lender MT Finance, says: “With the trend in rising interest rates continuing, the property market is slowly showing signs of calming down from the frenzy of the past couple of years.

“With property values at record highs, a continuous upward curve in pricing isn’t sustainable or helpful and the return of more realism is long overdue. However, with fewer buyers but also far fewer sellers, we are still seeing activity in the housing market, especially when it comes to prime assets.”

Joshua Raymond, director at financial brokerage XTB, said before the announcement: “We are expecting a rate hike of 0.5% which would put UK interest rates to 2.25% and their highest level since November 2008 – a near 14-year high. This would mark the seventh consecutive rate hike by the Monetary Policy Committee.

“It may be that a mere 0.5% hike could disappoint the markets and increase selling pressure on the pound.

“With the Truss government announcing a cap to average energy prices of £2500 for two years, this will likely tame headline inflation from hitting more troubling highs of 18% in early 2023 as previously predicted. It’s expected that inflation is likely to peak at around 11% next month”.

Nick Leeming, chairman of Jackson-Stops, says: “Our current era of historic low rates set an inevitable path for indices to predict an upward spiral in rates to tame the market, so many saw and planned for this impending increase. Longer term fixed mortgage deals remain available, with many buyers keen to get on with their move after years of instability caused by the pandemic.

“Inevitably, those who aren’t yet on the ladder and who don’t have a capital asset to benefit from are always hardest hit by such announcements, and it may cause those at the lower end of the market to revaluate their budgets.”

Simon Webb, managing director capital markets and finance at LiveMore Capital, says: “Today’s hike in Bank of England base rate, while widely anticipated, still means they are the highest they’ve been for a generation. There are many people for whom this will cause real financial hardship, particularly coming on top of escalating energy and food prices.

“While much focus is put on the younger generation, there are many people over 50 who will be really worrying about how they are going to make ends meet.”

Lucian Cook, head of residential research at Savills, says: “For existing borrowers, most have locked into fixed-rate mortgages, meaning there will be no immediate impact. And numbers opting for fixed rates have risen dramatically in the past five years meaning the market is more insulated than in the early 1990s or 2007, for example.

“For those new buyers not already locked into a mortgage offer, there will be a more immediate increase in costs. The average buyer taking on a £280,000 mortgage to buy a home worth £330,000 will pay an extra £65 per month or £780 per year.

“The cumulative effect of the rate rises in 2022 means the average monthly mortgage bill has risen from £349 at the beginning of the year to £1,150.”