The Bank of England said about 1.3 million mortgage borrowers are facing a crunch on their finances this year as their fixed-term deals expire.
(Bloomberg) — The Bank of England said about 1.3 million mortgage borrowers are facing a crunch on their finances this year as their fixed-term deals expire.
Those households are likely to have to take on new loans at significantly higher interest rates, requiring them on average to pay about £200 ($250) a month more, the central bank estimated Thursday.
The estimate highlights the impact the BOE’s rate rises are likely to have on consumers, adding to the pain inflicted by the highest inflation in four decades. The BOE has raised its benchmark lending rate from 0.1% in December 2021 to 4.5% on Thursday in an effort to keep a lid on further price increases.
The BOE estimates that only about a third of those rate hikes have fed through to the economy. The screws will tighten as borrowers draw to the close of their fixed-term deals, and are hit with the combined impact of 12 consecutive rate hikes.
The issue is emerging as one of the potential flashpoints in the general election widely expected next year. Chancellor of the Exchequer Jeremy Hunt voiced sympathy for those struggling with their finances but also said it’s important to quell inflation.
“It’s very challenging for families with mortgages to see interest rates go up,” Hunt said in a pooled clip for broadcasters. “Unless we tackle rising prices the cost of living crisis will just continue.”
Rachel Reeves, who shadows Hunt for the opposition Labour Party, said the government should impose a windfall tax on energy companies to help pay for cost-of-living support.
“Today will be a day of great anxiety for families and businesses around Britain facing the 12th increase now in interest rates,” Reeves said in an interview on Bloomberg television. “In the last six months people have paid an additional £1bn in mortgage payments because of the Tory mortgage penalty. The cost of living crisis is not going away.”
BOE Governor Andrew Bailey said changes in Bank Rate “are still working their way through the economy.”
“While we have seen higher rates being quoted on new mortgages,” he said. “The effective rates on the whole existing stock of mortgages is still catching up. Given such lags in the transmission of monetary policy, the rise in Bank Rate since December 2021 will weigh more on the economy in the coming quarters.”
As the impact of higher rates does begin to bite, this will squeeze consumer spending. The BOE thinks that by the end of 2025, changes in mortgage interest rate payments will have eaten into consumption by around 0.55%.
Hikes in the Bank’s base rate are transmitted more slowly to the economy than historically because of the rise in the popularity of fixed-term mortgages. The proportion of borrowers who have one of these deals has risen from 30% in the early 2000s to around 85%.
But the central bank’s bid to curtail inflation has prompted a reversal of this trend as Britons to turn to other corners of the mortgage market in an attempt to cut costs. Many households are now choosing tracker deals — a type of variable loan which typically follows interest rates — in a bet that borrowing costs will finally ease at the end of this year.
“Fixed mortgage rates could be unpredictable in the months to come,” said Rachel Springall, a finance expert at Moneyfacts Group Plc. “Some borrowers may sit on their revert rate, waiting for cheaper deals to surface.”
The sharp increase in the price of a home loan has also piled pressure on landlords, who are more exposed to pricier mortgages than other borrowers because most are on interest-only deals, which are more sensitive to rate hikes.
That’s bad news for those stuck in Britain’s rental market, where the average monthly amount paid for a newly let home rose almost 11% year-on-year to £1,236 in March, according to broker Hamptons International.
Read more:
- UK Mortgage Costs Risk Heading Higher Again With BOE Rate Hikes
–With assistance from Lizzy Burden, Elina Ganatra and Andrew Atkinson.
(Updates with charts and Rachel Reeves quotes from seventh paragraph.)
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