In the early stages of the cost-of-living crisis, one topic of conversation dominated above all others: energy bills. WhatsApp groups were flooded with stories of trebling monthly payments. Colleagues discussed direct debits over lunch. Jealous rumours spread about friends who had managed to secure cheap fixed deals at just the right moment.
In recent weeks the national obsession has noticeably changed – and it’s interest rates that have emerged as the thing we can’t stop talking about.
This is for good reason. The Bank of England has upped rates 14 times in succession since December 2021, taking the base rate to 5.25%. The continuous rises come after a 15-year period of cheap debt, with interest rates held at exceptionally low levels by historical standards. This anomaly allowed house-buyers to take out hefty mortgages without sacrificing their living standards.
As the base rate has shot up, banks and building societies have responded with rapid hikes to the cost of borrowing. In July, the average two-year fixed mortgage rate rose to 6.25% based on a 75% LTV, compared to 1.29% in July 2021, according to BoE data.
For a borrower with a £200,000 mortgage, this increase would bump their monthly payments from £781 to £1,319 – a difference of £538 a month and £6,456 a year. In London, where property prices are high, things are even more painful. According to research by Halifax bank, the average mortgage taken out by a first time buyer in 2022 in the capital was £393,522. The mortgage rate rises between the end of 2021 and the current day would drive up the payments on a mortgage of this size by £12,708 a year. It hardly needs saying that meeting costs like these is more than a matter of belt-tightening.
In theory, affordability checks carried out by lenders should mean borrowers will be able to swallow their new higher payments. But pricier mortgages come in tandem with other soaring costs which will hit some harder than others. Quite simply, inflation does not affect us all equally. That’s one of the reasons we've put together a number of online tools to help households make sense of their situation. Our calculators offer insights like the pay rise each person needs to keep up with inflation and what each household’s energy bills will look like over the next year.
Possibly the most alarming part of the interest rate story is that the worst is yet to come. Firstly, interest rates have not yet reached their peak. Markets now expect the base rate to rise to 6%. The reason behind this is the UK’s persistently high levels of inflation. While the rate of CPI fell to 6.8% last month, core inflation has remained sticky at 6.9%. This figure, which strips out more volatile items such as energy and food, is the one that really worries central bankers.
The second cause for concern is the fact that the mortgage time bomb has only partially exploded. This is down to the numbers of homeowners who are still on fixed rate mortgage deals taken out before rates began to soar. According to research by the Resolution Foundation think tank, only half of the households who will be hit by higher mortgage payments have been impacted so far. UK Finance figures show 800,000 fixed-rate deals end in the second half of 2023 and a further 1.6 million deals are due to end in 2024. Some of these will have taken out deals at their cheapest point, with rates around 1% or even lower.
The reality is that as interest rates continue to rise, there are households who will find themselves unable to meet their mortgage repayments. Some will face the prospect of their homes being repossessed. For a nation that got used to rock-bottom rates, the next few months will be a painful wake-up call.
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