Rising Rates Raises Mortgage and Cost of Living Concerns: Industry Reaction


The Bank of England’s decision to raise interest rates by 50 basis points, bringing interest rates to 1.75%, the highest in 27 years, will encourage homeowners to seek mortgage deals and further fuel cost of living concerns, according to the industry.

The move is an attempt to tackle rising inflation, which the central bank says will hit 13% before the end of the year, with some economists adding it could peak at 15% next spring. Inflation stood at 9.4% in June.

The rate hike is the sixth in a row since December, when the base rate was at a historic low of 0.1%.

Building Societies Association chief executive Robin Fieth said: “Another bank rate hike, the sixth since December, will be bad news for many landlords. But with about eight in ten fixed-rate mortgage holders, it will take time for these increases to be felt by many borrowers, as they will continue to pay the same amount each month until their current contract ends.

“When these fixed rates end, most will choose to either reconnect with their current provider or search the market. Although rates remain relatively low, we have seen fixed rates rise sharply since December and borrowers will need to consider the impact of rising rates alongside all other rising demands on their monthly income.

“It will likely cost those who, at the end of a two-year fixed rate, pay off a similar new contract around £100 more per month. For those on five-year fixed rates, their mortgage will likely increase their payments by around £60 a month.

Guild of Property Professionals chief executive Iain McKenzie said central bank rate hikes could slow the rise in property prices.

McKenzie said: “These decisions could also affect real estate prices in the months to come. Over the past two years, we’ve seen unprecedented demand for real estate, largely due to ultra-low interest rates that have made it easier to get a mortgage.

“As more and more people wanted to get on the real estate ladder, house prices soared. Another consecutive rise in interest rates could make potential buyers more hesitant to take out a mortgage If this is the case, we are likely to see house prices cool down to entice more people to buy.

But the managing director of SPF Private Clients, Mark Harris, predicts that the Bank could come to the end of its series of rate hikes.

Harris says: “Mortgage rates were still likely to rise again at this meeting, but we are close to the end of rate hikes.

“If you look at swap rates, then three-, five-, and ten-year silver are all lower than two-year silver, suggesting that the market thinks rates are going to peak and start to come back down.

“That said, fixed rate mortgages still have value and borrowers who need budget certainty should still repair. However, base rate trackers show lower starting pay rates and for those who can afford to be wrong – i.e. if rates go up they can still pay their mortgage – they start looking a better option.

“Rising lender prices is not always entirely a response to a change in the cost of funds, but a defensive mechanism to preserve service levels. If banks feel inundated with business and may struggle to cope, they may raise rates slightly to make them less attractive to borrowers.

However, the director of Financial Markets Online, Samuel Fuller, foresees much more difficulties for owners and consumers in the coming year.

Fuller says, “The independent bank has never raised rates before, but that doesn’t mean inflation will come down now.

“Global events continue to take their toll, and with the US Federal Reserve raising rates at an even faster pace, the Bank must walk a tightrope between killing demand and continuing to import too much inflation due to a weak pound.

The Bank will also soon start selling its mountain of gilts, which is already driving up government borrowing costs. It could also have unintended consequences.

“Predictions on the severity of the situation seem to be getting steadily worse, with credible forecasts that inflation will hit 15% early next year, weighing heavily on sentiment.

“The UK may not be as bad as places like Turkey, where inflation is growing at 80% a year, but that will be cold comfort when the energy shortage pushes the Kingdom United in dark and uncomfortable territory in the New Year Frankly, it’s an economic time bomb and rates are only going one way.

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