Bank of England Increases Interest Rates for Fourteenth Consecutive Time – Market Reactions

The Bank of England has hiked interest rates by 0.25 percentage points – pushing the benchmark rate to 5.25% up from 5% – representing the fourteenth consecutive rise since December 2021. This comes after official data revealed that inflation dropped to 7.9% in the year up to June in a bigger than expected drop according to the Office for National Statistics (ONS).

The rise will be felt by borrowers with mortgage and loan costs set to be higher as the last time the bank base rate stood at 5.25% was 15 years ago. More than 1.4 million people on tracker and variable mortgage deals will see an immediate increase in their monthly payments. The rise will be even stronger for the 1.5 million households with fixed mortgage deals set to expire this year. Homeowners who hold a fixed-rate mortgage will not witness a change immediately in their monthly payments, however those looking to remortgage face a sharp rise in repayments once they move on to a new deal. This comes after data from the Nationwide Building Society this week showed that property values declined by 3.8% in July – marking the biggest drop in 14 years – with the affordability of mortgages being attributed as the main factor for this drop.

CEO of home buying and property investment platform, Allbricks, Shahram Shaida, discusses the impact of the rise in interest rates on UK households:

“Rising interest rates is a blunt tool for fixing the economy that hurts certain elements of the market more than others. In reality, rising interest rates really only directly impact about a third of the UK population, only the mortgage holders. We’ve all seen a reduction in the number of mortgages being provided to first-time buyers and for many people with 5-10% mortgages, the interest rate hikes will be incredibly impactful. Some industry analysts predict millions of people will lose their homes because they can’t afford the repayments.

“It’s also not been great for landlords. Leveraging your debt and taking out additional mortgages to pay for new properties was the game when money was cheap, but the game has changed. Having taken advantage of leverage when the rates started increasing works against you quickly and we’re starting to see that also hit the market. By having another option in the marketplace that isn’t directly tied to interest rates, we believe will create the opportunity for stability and positive change.

“In late June, Jeremy Hunt on behalf of the government, openly asked the banks to make a change in their operating practices. But the reality is while banks aren’t passing on the interest rate hikes to our saving accounts, they are very quick to raise our mortgage rates. Ultimately banks don’t have to pass on the interest rate hikes to consumers, but as the rate hikes enable them to make a lot of money, they aren’t incentivised to do otherwise.”

Chris Arcari, Head of Capital Markets, Hymans Robertson, said:

“With headline and core inflation running at 7.9% and 6.9% year-on-year, respectively, the Bank of England was fully expected to raise rates at today’s meeting. However, following June’s downside surprise in inflation figures– with both headline and core inflation falling more than expected – the Bank of England stepped back down to the more “usual” 0.25% p.a. rate rise today, taking the base rate to 5.25% p.a. Ahead of the announcement, markets were split between whether the BoE would raise rates 0.25% p.a. or 0.5% p.a..

“Given the more labour-intensive nature of the service sector, the BoE keeps a keen eye on UK CPI services inflation, which rose 7.2% year-on-year in June. The BoE is concerned that strong service-sector price growth is being underpinned by strong nominal wage growth, which rose 7.3% year-on-year in the 3 months to end May. Against this backdrop, the market is pricing in the BoE base rate will rise to around 6% p.a. early next year.” 

Kellie Steed, Uswitch.com mortgage expert comments: 

“NatWest, Halifax and Virgin Money all cut rates across a range of their mortgage products yesterday, ahead of today’s announcement. However, it’s important to note that lenders factor in the cost of fixed-rate deals quite far in advance, so today’s increase would likely not have influenced their decision greatly, no matter whether it increased or decreased. However, lender confidence is certainly improving generally, as last week also saw three more major lenders , Nationwide, Barclays and TSB cut many of their rates even further ahead of the BoE announcement.

“Whether mortgage interest rates continue to be cut throughout the remainder of 2023 depends on wider economic circumstances, such as the future trajectory of inflation. ONS release the next inflation data in just under two weeks, on 16 August.

Is it time to fix?

“As of today, the average 75% LTV 2 year fixed-rate deal is at 6.81% for residential purchase – still higher than the peak of 6.65% seen in October 2022 after the September mini-budget. 5 year fixes remain slightly lower, at an average rate of 6.45% at 75% LTV for residential mortgages.

“People are, understandably, reluctant to lock in a high interest rate when there’s growing confidence that mortgage rates look to be gradually declining. However the average SVR remains high, at 8.49%, so despite the relatively modest reductions seen in both fixed and variable deals recently, it’s still absolutely worth looking at your remortgage options to avoid a high SVR.

“Don’t forget, you can switch your mortgage deal up to six months ahead of your current deals end date – allowing you to lock in a new rate now, just in case. If rates do fall, then you’re not locked into the deal until your existing one expires, so you can just switch again to the cheapest product available at the time. However, if rates unexpectedly rise again, you’ll already have secured a more competitive deal, giving you less to worry about.

What about variable rates?

“Those with a tracker mortgage will weather another immediate rise in their current interest rate from today. Despite the impending 0.25% increase in the base rate, as of today, the average 2-year tracker is still cheaper than the average fixed-rate mortgage, at 5.69% at 75% LTV.

“Nevertheless after 14 consecutive increases, many will be seriously considering whether the security of a short fixed-rate deal is worth the additional cost.What to do if you’re struggling to pay your mortgage.

“Back in June, The Mortgage Charter was drawn up between the FCA, the government and most major mortgage lenders. It introduced a range of easements (or temporary coping measures) for those unable to afford their mortgage repayments.

“On 1st August, UK Finance launched the Reach Out campaign to draw further attention to the mortgage charter, in an attempt to ensure those struggling know what help is available to them.Lenders are aware that recent dramatic interest rate rises have impacted their customers’ affordability and most are poised to help in whatever way possible. The emphasis is to ‘reach out’ to your lender, rather than waiting until you become completely unable to pay your mortgage.”

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Andy Sommerville, Director at Search Acumen, the property data and insight provider, comments:

“The impact of another interest rate rise will force the wider commercial market to assess its growth prospects in the short-term, as the prevailing high cost of debt slows investor demand.

“This drag on spending is putting both the momentum and resilience of the private sector to the test, as the short to mid-term outlook appears as clear as mud.

“However, lower property valuations are likely to facilitate an uptick in opportunistic purchases in both commercial and residential, meaning those in the long game will see the best returns.

“Larger entities with less debt are likely to continue to expand their portfolios and diversify investment streams to withstand future uncertainties. Although the office sector continues to take a hit, we’ve seen industrial sectors fare better in the last few months, alongside health care and life sciences. Early indications for Q3 suggest that the investment market in the second half of this year will be more active than the first.

“But to maintain stable growth, the cycle of prolonged rate rises must come to an end. It is essential for the UK’s economic future that all investors can confidently participate in the market, particularly in our built environment as a key indicator of wider business growth.

“In cycles of market uncertainty, it is more vital than ever for investors to transact quickly and efficiently, whilst feeling confident that the due diligence of their onward purchase is reliable and thorough. The use of technology in our sector plays an absolutely vital role in transaction resilience, ultimately ensuring less deals fall out of bed. With a range of external headwinds at large, the time for digitalisation to move further up the priority list is now.”