The Bank of England raised interest rates in September from 1.75% to 2.25%. The 0.5 percentage point increase marks the seventh rise since December 2021 when Bank rate stood at just 0.1%. It also puts Bank rate at its highest level for 14 years.
Concerns are mounting around further, and steeper, interest rate rises in the face of sterling volatility and increasing market uncertainty. Some mortgage lenders, including Halifax, Virgin Money and Skipton Building Society are pulling mortgage deals for new applicants.
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Interest rates, mortgages…
So what do climbing interest rates mean for mortgages? The two million homeowners on variable rate deals, such as base rate trackers, will see an almost immediate rise in their monthly repayments following the recent Bank rate rise to 2.25%. As an example, a tracker rate rising from 3.5% to 4% will cost almost an extra £60 a month on a £200,000 loan.
Remortgagers and first-time buyers will also be faced with higher mortgage costs when they come to source a deal, with the cost of new fixed rates having already factored the latest rise into the price.
… house prices and Stamp Duty
As well as more expensive mortgages, those looking to buy or move home are grappling with relentlessly rising property prices. The average cost of a property coming to the market increased by 0.7% in September (£2,587) to £367,760, according to Rightmove. Annually, average asking prices are 8.7% higher in September than a year ago.
However, Stamp Duty cuts announced in Friday’s Mini Budget – which raised the nil-rate band on the purchase of a property from £125,000 to £250,000 – means that with a third (33%) of all homes listed on Rightmove are now exempt from the tax.
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Fixed rate mortgages
More and more homeowners are now opting for longer-term fixed mortgages in a bid for stability in the face of continued rising interest rates. But while, historically, borrowers would pay more to fix in for longer, the price gap is closing.
According to mortgage broker Trussle, the top interest rate on a no-fee 75% loan-to-value fixed rate mortgage is now 3.25% over two years, 3.35% over five years, or 3.99% over 10 years. Refer to our mortgage tables below for what deals are available today for your deposit level and circumstances.
Why are interest rates rising?
The Bank of England’s Monetary Policy Committee (MPC) uses interest hikes as a means of cooling the economy and taming rising inflation. The Consumer Prices Index (CPI) measure of inflation already stands at a heady 9.9% in the 12 months to August against a government target of 2%.
And with the pound falling dramatically on the international currency markets this week, there are fears that inflation could continue to balloon, prompting the Bank of England to hike rates to as high as 6% from their current 2.25% by next year.
The Bank’s MPC is scheduled to next meet on 3 November to decide on interest rates. However, depending on what happens in the markets and wider economy, there is a possibility that an ’emergency rate rise’ could happen sooner, although the Bank has suggested this is unlikely.
One of the main longer-term drivers behind rising inflation is the cost of energy. The government has intervened by replacing the energy price cap – which had been due to send energy prices soaring to over £3,500 a year from 1 October – with a cheaper Energy Price Guarantee.
This will limit the cost of typical-use household bills to £2,500 a year for two years, with an additional £400 automatic discount applied to electricity bills for every household between October 2022 and March 2023.
By Laura Howard