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Mortgage misery for millions following rate rise

Millions of people struggling with the rising cost of living will face mounting financial pain in the coming months as rising inflation in the UK leads to rising bills for variable and fixed rate mortgage borrowers.

The Bank of England on Thursday raised its key interest rate by 0.5 percentage point to 1.75%, the largest increase in 27 years.

About 2 million people in the UK have either standard floating rate home loans or tracker mortgages, which track the BoE’s base rate.

Barclays and Santander were among the lenders who said their standard floating rate mortgages would rise 0.5 percentage points after the announcement. Nationwide, HSBC and NatWest have yet to make a decision on changing standard floating rate products, but will raise mortgage interest rates in line with the BoE’s decision.

Bar chart of outstanding mortgages (%) showing that fixed rate mortgages have become dominant in the UK market

Borrowers of fixed rate mortgages – the most common type of home loan in the UK – are protected from immediate changes in interest rates. However, about 40 percent of these will expire this or next year, exposing borrowers to higher rates.

“The people who will feel this immediately are on the variable deals — especially those on standard variable rates,” said David Hollingworth, associate director at L&C Mortgages.

“But there’s not too much room for complacency for those with flat rates, which have been evolving at an astonishing pace since late last year.”

Several major lenders had made changes to their fixed income products prior to the BoE announcement, with Halifax, NatWest and HSBC raising rates for some of their solutions, and lenders, including Co-operative Bank and Leeds Building Society, which had selected selected fixed income withdrawn deals.

According to Moneyfacts, a 0.5 percentage point increase from the current average standard variable rate of 5.17 percent would add £1,400 to a total mortgage account over two years, based on a £200,000 redemption mortgage.

But borrowers who switched to a fixed-income deal were able to realize significant savings. Moving to a two-year rate at the current average of 3.95 percent would save about £3,333 in two years, Moneyfacts said.

In addition to its rate decision, the BoE said it expected inflation to rise above 13 percent by the end of the year — significantly higher than May’s forecast — following the latest rise in gas prices.

Housing experts pointed to the impact of this bleak economic outlook on house prices, which have fallen for the first time in a year, according to Halifax, one of the largest mortgage lenders in the UK. It said on Friday that average home prices fell 0.1 percent in July, noting that “rising borrowing costs are putting pressure on household budgets.”

Halifax warned against placing too much weight on the month-long data, especially if housing supply remained tight. However, Russell Galley, director of Halifax, said the leading indicators point to a weakening in activity in recent weeks – and beyond.

“Looking ahead, housing prices are likely to come under more pressure if . . . the headwinds of rising interest rates and rising cost of living are gaining traction.”

British households are facing increasing pressure on their household spending, with fuel and food prices rising, partly as a result of the Russian invasion of Ukraine.

“The cost of living, interest rate hikes and the rise in home prices can price out potential buyers if they have little disposable income and then eat up their savings,” said Rachel Springall, financial expert at Moneyfacts.

Interest rate hikes can nevertheless be good news for savers, who see a higher return on their money. Few banks have fully passed on to savers the successive BoE rate hikes over the past eight months.

Santander said it would raise rates on its 123 current account, junior Isa and first savings account so that customers would earn 1 percent per annum on deposits of up to £20,000. The move represents a 0.25 percentage point increase, half of the BoE key rate hike – although the Help to Buy Isa will see the full rise passed through.

Laura Suter, head of personal finance at investment brokerage AJ Bell, said savers would continue to benefit from increased competition among banks on their savings rates after the BoE started raising base rates last year.

“The jump in rates should fuel that savings boom,” she said. “But with inflation expected to rise longer and higher, savers are being rewarded on the one hand, but on the other they see much more being used.”

In July, William Chalmers, chief financial officer of Lloyds Banking Group, the UK’s largest mortgage lender, said the lender had seen “slight easing” in new mortgage applications, but refinancing activity remained strong.

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