Millions of people struggling with the rising cost of living face mounting financial pain over the coming months, as high inflation in the UK drives up bills for variable and fixed mortgage borrowers.
On Thursday, the Bank of England raised its key interest rate by 0.5 percentage point to 1.75 per cent, the largest increase in 27 years.
About two million people in the UK either have standard variable rate home loans or mortgages that follow the Bank of England’s prime rate.
Barclays and Santander were among several lenders who said their benchmark variable rate mortgages would increase 0.5 percentage point after the announcement. Nationally, HSBC and NatWest have not yet made a decision on changing the standard variable rate products, but they will increase their tracked mortgage rates in line with the BoE’s decision.
Borrowers on fixed rate mortgages – the dominant type of UK housing loan – are protected from immediate changes in interest rates. However, about 40 percent of it is set to expire this year or next, exposing borrowers to higher rates.
“People who are going to feel that right away are on variable deals — especially those with standard variable rates,” said David Hollingworth, associate director at L&C Mortgages.
“But there is not much room for complacency for those who depend on fixed rates, which have been moving at an astonishing speed since the end of last year.”
Several large lenders made changes to their fixed rate products before the BoE announcement, with Halifax, NatWest and HSBC raising rates on a number of their reforms, and lenders, including the Co-operative Bank and Leeds Building Association, withdrawing interest rate-set deals. Fixed .
According to Moneyfacts, a 0.5 percentage point increase in the current standard variable rate of 5.17 per cent would add £1,400 to the total home loan bill over two years, based on a £200,000 repayment mortgage.
But borrowers who switch to a fixed rate deal can make significant savings. Moneyfacts said moving to the two-year average at the current 3.95 per cent would save around £3,333 over two years.
Alongside the interest rate decision, the Bank of England said it expects inflation to rise above 13 per cent by the end of the year – well above its forecast in May – after the recent rise in gas prices.
Housing market experts have pointed to the impact of this bleak economic outlook on house prices, which fell for the first time in a year, according to Halifax, one of the UK’s largest mortgage lenders. On Friday, it said average home prices fell 0.1 percent in July, noting that “rising borrowing costs are putting more pressure on household budgets.”
Halifax cautioned against putting in too much storage for a month’s data, especially when the housing supply remained tight. However, Russell Galley, managing director of Halifax, said the leading indicators are pointing to a dip in activity in recent weeks — and more to come.
“Looking forward, home prices are likely to come under further pressure…the headwinds of higher interest rates and an increase in the cost of living are taking a stronger position.”
Households in the UK are facing increasing pressure on their spending, with fuel and food prices rising in part due to the Russian invasion of Ukraine.
“The cost-of-living crisis, rising interest rates, and home price growth can weigh on potential buyers if they have little disposable income and thus eat away at their savings,” said Rachel Springall, a financial expert at Moneyfact.
However, the price increase can be good news for savers, who are seeing greater returns on their money. But few banks have fully transferred the increases to savers from consecutive Bank of England interest rate increases over the past eight months.
Santander said it would increase interest rates on its 123 checking account, Little Issa account and First Savings Account, so that customers earn 1 per cent a year on balances of up to £20,000. The move represents a 0.25 percentage point rise, and half of the BoE’s policy rate has risen – although help to buy Essa will see the full rally pass through.
Laura Sutter, head of personal finance at investment broker AJ Bell, said savers will continue to benefit from increased competition between banks for their savings rates after the Bank of England began raising key rates last year.
“The jump in rates should inject fuel into the savings boom,” she said. “However, with inflation expected to rise now and for a longer period, savers are rewarded on the one hand but see more takeover on the other.”
In July, William Chalmers, chief financial officer of Lloyds Banking, the UK’s largest mortgage provider, said the lender had seen a “slight dip” in new mortgage applications, but refinancing activity remained strong.