Homeowners may have to face more mortgage pain in the future as fixed-rate deals expire and interest rates continue to rise. Image: Benjamin Elliott / Unsplash
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The Bank of England has raised interest rates over the last year in a bid to get a hold on the inflation that has been driving the cost of living crisis – but that spells bad news for people with mortgages.
BoE governor Andrew Bailey confirmed interest rates would hit 4.5% in May. That rise was the 12th successive increase in borrowing costs, taking interest rates up to levels not seen since 2008 when the world was hit by a global financial crisis.
Bailey said the move was the central bank’s response to inflation which has remained above 10% in recent months, sending the cost of essentials like food rocketing and making it harder for people on lower incomes to make ends meet.
But that has a knock-on effect for people on mortgages that are not fixed to an agreed interest rate and they face higher monthly payments.
Chancellor of the Exchequer Jeremy Hunt said it was “very challenging for families with mortgages to see interest rates go up” but said the interest rate rise was essential to tackle inflation.
Here’s everything you need to know about rising mortgage rates and whether they will fall in the future.
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Why are mortgages going up?
Rising interest rates mean it costs more to borrow money from banks and other lenders, while people who save money in banks receive more interest for putting their money into accounts.
The Bank of England says it is increasing interest rates to bring inflation down but it takes time to work, usually up to two years.
The idea is that higher interest rates mean less money is being spent in the UK and that brings down the overall spending in the economy and slows price rises down.
As mortgages are a type of credit, they are affected by rising interest rates.
However, not all mortgages are affected. People who have a fixed-rate mortgage will be largely insulated from interest rate rises until the fixed rate comes to an end and a new one needs to be negotiated.
People on tracker mortgages are more susceptible to interest rate rises because they follow the base rates set by the Bank of England.
Many mortgage lenders already put up fixed-rate mortgages for new customers ahead of the interest rate, according to Rightmove’s mortgage expert Matt Smith.
The property expert said the average interest rate for a five-year fixed 85% mortgage rose from 4.44% to 4.52% ahead of the BoE announcement. That works out at an extra £14 a month for someone purchasing a typical property and spreading the cost over 25 years.
Smith said people on tracker mortgages may be hit harder by the BoE’s decision to raise interest rates.
The Rightmove expert said: “Those on a tracker mortgage will be more disappointed with the news, as they may have thought that the base rate had peaked in March given some of the positive signs for the wider economy, and this is another cost they will need to factor into their monthly budget when the full rate rise is passed on.”
How high will mortgage rates go in the UK?
It’s impossible to say how high interest rates may go without the aid of a crystal ball but the Bank of England has given some indication of how it expects things to progress in the future.
The central bank has targeted getting inflation down to 2% by the end of 2024 – it is currently at a “higher than expected” 10.2%.
BoE forecasts predict that interest rates will peak at 4.75% at the end of 2023 before falling to around 3.5% by 2025.
But while inflation remains high, there is the possibility of interest rates rising to counteract it and that could mean a 13th consecutive monthly rise might be on the cards in June.
Are mortgage rates coming down in 2023?
With interest rates set to remain high until inflation starts to fall, that could see mortgage rates remain stagnant.
Rightmove’s Smith said: “Looking ahead, if the Bank of England outlines a positive view on the prospect for inflation and base rates, we could see mortgage rates fall, as they have done after recent base rate decisions. But if the bank is more cautious, we can expect rates to continue their upward trend in the short term.”
However, the bad news for people paying off mortgages is that a lot of the pain could still be to come.
Think tank Resolution Foundation said two-thirds of the eventual £12 billion increase in annual mortgage costs across Britain may still yet to be passed on.
That’s because fixed-rate mortgages have become more popular in recent years – the think tank said fixed-rate deals accounted for £4 out of every £10 spent before the financial crisis but now £9 out of every £10 lent is at a fixed rate.
Mortgages that are at a fixed rate for five years also became the most popular product between 2016 and 2022, overtaking two-year fixed mortgages.
As a result, many households are yet to see existing deals expire with around half of the 7.5 million mortgagor households across Britain yet to see mortgage rates rise.
That means rough times ahead for homeowners. Between the start of 2023 and the end of 2024, total mortgage repayments are collectively set to rise by £5.3bn as 1.6 million households see fixed-rate deals expire. The average household will see an annual increase of around £2,300 per year on mortgage bills.
Three-quarters of these rises will affect the richest two-fifths of households. But younger and poorer households will be hit harder by rising costs. Repayments will increase by more than 4% for households with an income in the second lowest earnings quintile compared to a 2% difference for the highest earners.
“While interest rate rises might be coming to an end, there will be plenty more mortgage pain to come,” said Simon Pittaway, a senior economist at Resolution Foundation.
If you are struggling to pay your mortgage, the first thing you should do is contact your lender to discuss your options.
If you are receiving universal credit or other benefits, you may be able to get a Support for Mortgage Interest Loan to help you cover rising interest payments. This is from the Department for Work and Pensions (DWP) and you have to repay the loan when you sell the property.
Additional support is available in Scotland through the Home Owners’ Support Fund. This is based on two schemes – the Mortgage to Shared Equity scheme will see the Scottish Government buy a stake in a property to reduce the loan while the Mortgage to Rent scheme allows a social landlord to buy a property and rent it back.
Around one in seven mortgage holders who seek help from StepChange are in arrears on their mortgage, the debt charity said.
“The situation is becoming increasingly precarious for many people and widespread problem debt is a risk, particularly for financially vulnerable households,” said Vikki Brownridge, chief executive of StepChange in a call for firms to be “proactive” in supporting people who are struggling to pay.
“For anyone worried about housing costs and their ability to cover payments, it’s important to reach out for help as early as possible, whether that’s through contacting their lender, or a free debt advice charity like StepChange.”
If you are struggling to pay, support from StepChange and other debt charities is available or you can call the National Debtline on 0808 808 4000 or contact Citizens Advice for advice.
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