The interest rate in the UK has been increased for the first time in a decade meaning that home owners with mortgages on lenders’ standard variable rates are likely to find their monthly bill going up from December.
The Bank of England’s Monetary Policy Committee announced a 0.25% rise, taking the rate to 0.5%, and while it will affect SVR mortgage rates, home owners on fixed rate mortgages will not pay more until their deal comes to an end.
It is likely to be the first of a number of rises over the next five years with forecasts indicating it could reach 2.25% by 2022. JLL predicts that there will be steady, small rises up to 2.25% in its new property market forecast report.
In its latest housing market forecast Savills also predicts that the Bank of England base rate will reach 2.5% over the period and average mortgage rates reach 4% over the next five years.
Ian Kernohan, economist at Royal London Asset Management, believes that further hikes will depend on Brexit. ‘As long as interest rates rise very gradually from here, then with around 60% of mortgages on fixed rate deals, the impact on household finances shouldn’t be too severe, and will be offset by any future fall in inflation,’ he said.
‘We assume that the MPC will raise rates slowly over the next two years, assuming a Brexit deal is visible by the middle of 2018, unemployment remains low and global growth holds up. With inflation set to fall next year as the impact of sterling devaluation wanes, the MPC will stop hiking if there are clear signs that the economy is slowing,’ he added.
June Deasy, head of mortgage policy at UK Finance, pointed out that the majority of borrowers will be protected from any immediate effects of today’s small increase because they have a fixed rate mortgage. ‘Over the last year, two thirds of first time buyers have opted to fix their rate for up to two years, with a further one in four opting to fix for two to five years,’ she said.
‘Given that variable rate lenders assess the ability of applicants to pay at much higher interest rates, most should be able to cope with any increases as they filter down. Rates remain very low by historical standards and borrowers remain well placed to get a good deal from the UK’s increasingly competitive mortgage market. Anyone with concerns about managing their mortgage should contact their lender as soon as possible to discuss the advice and support available,’ she added.
The key issue for home owners with mortgages will be looking ahead as to whether it is the start of subsequent increases in the years ahead, according to Sally Francis, money expert at MoneySuperMarket. ‘Mortgage holders will be the most affected as tracker deals will automatically increase in line with base rate and variable rate deals are likely to follow suit,’ she said.
‘Those on fixed rate deals are safe for the time being but when the term comes to an end new fixed deals could be more expensive. If you’re not on a fixed deal now you may want to consider pouncing on a competitive rate to secure cheaper payments for longer,’ she explained.
But not everyone expects the rise to be the start of a stream of increases. Neil Williams, group chief economist at Hermes Investment Management, thinks it is a one off. ‘Today’s quarter point rate hike shouldn’t raise eyebrows, and looks for now to be a one-off muscle flex by the Bank of England, rather than the start of an aggressive tightening,’ he said.
‘What it does is reverse the post-referendum cut from 15 months ago, which, with activity broadly holding up, may have been an unnecessary safety net,’ he added.
David Hollingworth of L&C Mortgages pointed out that lenders passed on the rate cut last year and so it will be of little surprise to see their variable rates edge back up. He explained that an increase of 0.25% on a £150,000 standard variable mortgage at 4.5% over 25 years would see payments rise by more than £20 per month.
He also pointed out that the rise takes rates back to where they were 15 months ago and those that have so far failed to take advantage of the record low fixed deals will find that rates have already edged up as expectation of a rate rise increased. Nonetheless borrowers can make big savings over SVR and also protect against any future rate rises.
Rates have simply gone back to a level that itself was an all-time low for the best part of a decade, Mark Posniak, managing director of Octane Capital, pointed out. ‘What the Bank has effectively done is send up a flare, announcing to home owners that the artificial rate environment we have been in for so long will, at some point, come to an end, especially with inflation as high as it is,’ he explained.
‘There is without doubt some symbolism around this first increase for 10 years but it is highly unlikely to cause the property market to implode. While it might give some prospective buyers pause for thought, it could actually cause others to act and take the initiative before rates potentially rise further. Arguably the real challenge comes not with the first rate rise we have now had but the one after that,’ he added.