Homeowners and buyers face the biggest mortgage “rate shock” since the 1980s following the largest rise in the Bank Rate in 27 years.
Economists have warned that house price falls are now imminent as the Bank of England’s sixth consecutive rate rise means that repayments on home loans are rising twice as fast as they did in the run-up to the financial crisis of 2008.
Thursday’s 0.5 percentage point rise means that new mortgage rates will be three times higher than at the end of last year. A series of Bank Rate increases in the 1980s – to a peak of 15pc in 1989 – helped trigger three-and-a-half years of falling house prices in the early 1990s.
Yet while some high street lenders increased mortgage rates before the latest rate rise, banks have not passed on the benefits to savers as quickly. The average easy-access rates on savings were just 0.76pc. Getting on the property ladder is only becoming harder.
Before the Bank began to raise interest rates in December last year, the average rate on a two-year fixed-rate mortgage for a buyer with a 25pc deposit was 1.2pc.
Now the same buyer would have to pay 3.63pc. Over the course of a two-year mortgage, they will pay £6,288 more than if they had bought at the end of 2021.
That jump in repayments is already roughly double the increase in mortgage payments recorded across the entire period of rising mortgage rates between 2005 and 2007. This is despite the fact that interest rates are still far lower than in 2007. Today’s rate changes have a much bigger impact on the housing market for three reasons.
First, today’s rises have happened far more quickly. Second, they began from a record low level, which means the relative impact on monthly payments is much higher. Lastly, house prices have increased so quickly recently that small changes to rates make a big difference.
Aneisha Beveridge of estate agent Hamptons said: “Higher house prices mean the impact of smaller rate increases has been amplified.”
In 2005 a buyer needed to earn £29,919 a year to get a mortgage on an average home. By 2007 this figure had jumped by £5,100. After Thursday’s rate rise, buyers will need to earn £48,761 to get a mortgage on a typical property – £11,600 more than at the end of 2021.
However, there is likely to be more pain to come. Analysts expect the Bank Rate to climb further – to 3pc next year. The average rate on a two-year fixed deal for a buyer with a 25pc deposit would then jump to 4.88pc, according to Hamptons. This would be four times the rate at the end of 2021.
To buy an average home in London a buyer would need to earn £101,757 – 50pc more than a year ago.
Rising costs will also be a major blow to buyer demand, which was already plunging. Research firm Capital Economics has forecast that house prices will fall by between 5pc and 10pc over the next two years.
Adrian Lowery of Evelyn Partners, a wealth manager, said there was also now a wave of homeowners coming to the end of very cheap fixed-rate deals secured when rates were at rock bottom.
Government incentives such as the stamp duty holiday encouraged large numbers of younger buyers to leap into the property market during the pandemic, Mr Lowery said.
A record 1.8 million homeowners will come to the end of their deal next year, according to UK Finance, the banking trade group.
Many will face higher costs when they remortgage. A couple who borrowed £280,000 in July 2020 with an average two-year fixed-rate deal at 2.13pc would have paid £1,205 a month. Over the past two years they will have reduced their loan to around £260,000, but they will still have to pay an extra £200 a month when they remortgage now, said Mr Lowery.
The shock will be even worse for people who took out five-year mortgages now expiring. They would have paid 1.7pc in 2017 and could end up taking out loans at more than 4pc.
Fight back against rate rises
If they can afford to, homeowners can reduce their mortgage bills by making overpayments while they are still on a lower rate, said Mr Lowery.
“Not only will this reduce the overall cost but it could also reduce the size of the loan to the point that it is in a lower loan-to-value bracket, making cheaper deals available,” he said.
They should also check the value of their property. “If you think your home is worth a lot more, getting a new valuation might garner you a better deal,” Mr Lowery said.
In the year to May alone, house prices rose by 12.8pc. This means many borrowers could find they have gained enough equity to qualify for a different rate band. They could also cut monthly payments by increasing the term of the loan, although this means making more interest payments in total.
Buyers who are thinking of taking out a five-year or 10-year fixed-rate deal should be aware that mortgage rates could fall during that period, Mr Lowery said.