Laura Suter, head of personal finance at AJ Bell, comments on the latest Bank of England Monetary Policy Committee decision:
“The Bank’s decision to hike rates by the largest amount since 1995 piles misery on anyone with debt, at a time when borrowing is booming as people struggle to make ends meet in the cost of living crisis.
“The decision to increase rates to 1.75%, taking us back to levels not seen since 2008, is a hammer blow to anyone on a variable rate mortgage or a fixed-rate mortgage expiring in the next few months.
“The bank has heaped more doom on households with its updated expectations for inflation, the economy and wages. It now thinks inflation will hit 13% this year, rather than the 11% it previously predicted, but will also stay high throughout next year, standing at 9.5% in Q3 next year. At the same time the Bank predicts that once inflation is taken into account household incomes will fall ‘sharply’ both this year and next – put simply, we will all need to pay much more for the same items and will have less money to do so.
“Today’s move will add £752m a year to the nation’s mortgage bills, with almost 2 million people in the UK on variable rate mortgages. Someone with £400,000 of borrowing on a variable rate mortgage will see £104 added to their monthly mortgage bill as a result of this hike.
“The bright spot from today’s hike is for savers, who have already benefitted from a savings war since the Bank started hiking rates. Today’s leap in rates should put fuel into that savings boom. However, with inflation now expected to go higher and for longer, savers are being rewarded on the one hand but seeing far more taken on the other.”
Savers
We’ve already seen a rates war break out in the savings market and savers are finally being rewarded for the cash they’ve stashed. The top easy-access account has leapt from 0.71% on the day the Bank of England first started hiking rates in December up to 1.8% today. That means on £10,000 of cash you’re making £109 more interest a year than you were at the end of last year. Today’s chunkier hike will give another boost to savings rates.
“That said, with a backdrop of inflation at 9.4%, and an expectation it will reach 11% in a few months, many savers will struggle to get excited by the increase we’ve seen in best buy savings rates since December, because the real value of their savings is still shrinking significantly in real terms.
“When interest rates first began to increase inflation was at 5.1% and the top easy-access account was 0.71%, meaning that the gap between inflation and the best-buy savings account was 4.39 percentage points. Fast forward to now, and with inflation having leapt ahead to 9.4% and that top-buy account at 1.8%, the gap has leapt ahead to 7.6 percentage points.
“However, switching accounts is infinitely easier and quicker than it used to be, meaning there’s no reason not to spend 10 minutes getting a market-beating cash savings rate, rather than leaving your cash in an account earning 0.01% or lower.
“One word of warning is in the fixed-rate savings market, where we’ve seen fierce competition to get to the top of the best buy tables. Any fixed-rate you lock in today will mean missing out on future interest rate rises – banks aren’t stupid, they are trying to draw in money now to make more profits if rates rise further. We’re still expecting the Bank to continue rate rising this year and well into next year, which means locking in a fixed rate savings account today means missing out on any of those increases.”
Mortgage holders
“Millions of homeowners will see their mortgage costs rise thanks to today’s hike – just over a fifth of all mortgage holders are on a variable rate deal. Of those on a variable rate, around 800,000 are on a tracker deal and the remainder are stuck on their lender’s standard variable rate – the highest rate a lender will charge.
“The average UK homeowner has £131,000 of mortgage debt, according to UK Finance, and so those on a tracker deal will see their mortgage costs rise by £396 a year* as a result of today’s increase. When you extend this over the 1.9m people who have a variable rate mortgage, it leaves UK households with an estimated £752m hike in their annual mortgage bills just from today’s rate rise alone.
“For someone with £200,000 of borrowing** today’s rise of 0.5 percentage points will add another £624 onto their mortgage costs each year – or £52 a month. On £400,000 of borrowing that 0.5 percentage point rise will mean a £1,248 increase in the annual mortgage bill, or £104 a month.
“That’s enough on its own, but coupled with all the previous rate rise increases since December last year it means mortgage holders on a tracker deal have had to stomach a 1.65 percentage point increase in their interest costs over the past eight months. For someone with £200,000 of borrowing that’s an extra £2,088 a year in costs. Or at the higher borrowing of £400,000 it means an eye-watering extra £4,176 on their mortgage costs – that equates to an extra £11 a day over the year.
“The group who face the biggest shock are those who fixed their mortgage rate in the past few years, when rates were rock bottom, and will be coming off those fixes to far higher interest rates. If we assume all of today’s rate rise is passed on in mortgage rates, someone with £200,000 of borrowing who fixed their mortgage two years ago is facing a £2,100 annual increase and those who fixed five years ago are seeing a £1,368 a year increase***.”
*Assumes 80% loan-to-value on the average UK borrowing of £131,000 over a 20-year term on a repayment basis and the average tracker rate of 2.81% increasing by 0.5 percentage points.
** Rates assume a 25-year mortgage term and 80% loan-to-value.
*** Rates based on 75% loan-to-value. Mortgage calculations based on £200,000 of borrowing over 25 years when original fix was taken out, with new fix keeping same mortgage maturity and accounting for no additional borrowing or overpayments.
