There are growing signs that the Bank of England will not lower or even peg interest rates before the end of the year — and are more likely to put them up further, according to the latest forecasts.
Concerns that the Bank of England could raise interest rates higher, from the present 4.5% to as high as 5.5%, are causing turbulence in the mortgage markets. Lenders are reportedly pulling hundreds of deals and increasing rates, throwing more borrowers into uncertainty about the future.
The Bank of England next meets on June 22 to decide if interest rates should go higher, but the decision will be set against a background of wage increases and stubbornly high inflation in some sectors.
Mortgage rates are beginning to approach levels last experienced in the 1980s, according to some financial experts. Fixed-rate home loans have risen sharply, putting an average 2-year fixed rate mortgage at 5.9%.
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Just last month, the Bank of England was given political cover to keep raising the rates after the Chancellor, Jeremy Hunt, said he was “comfortable” for the institution to do what it takes to cool inflation, even at the risk of provoking a recession.
There had been hopes that interest rate rises would abate after hitting 4.5%, but there were fears among analysts that they could increase by as much as a percentage point and a quarter to 5.75%.
The reason the present situation is being compared to the double-digit interest rates of the 1980s is because homeowners now borrow much larger amounts relative to their income, so although the rates look much lower, they will have a similarly dramatic effect on mortgage outgoings as they did 40 years ago.
In the 1980s when mortgage rates hit 13%, borrowers took on average two times their income, so mortgage costs would therefore be similar to today’s 6% figure.
Today, people can have mortgages equivalent to four times their income — or even above. According to an article in the i newspaper, borrowing £200,000 at an interest rate of 6% as against borrowing £114,300 at 13% results in roughly the same monthly mortgage of £1,289.
In the early 1980s, the price of the average UK house was £20,897 (about £84,000 in today’s money). Today, the average house price is £285,000.
The i reported that financial markets were now predicting the base rate would rise to 5.75% by the end of the year, due to strong wage growth, which would keep inflation up.
This will mean inflation will remain a problem and the Bank of England will be forced into taking more action, which will mean a rise in base interest rates. Another consequence usually comes in the form of higher unemployment.
At the Bank of England’s Monetary Policy Committee meeting next week it is widely considered members will increase rates by a further 0.25 percentage points, heaping more pressure on homeowners with mortgages. Lenders are said to be preparing for an increase in borrowers asking for some kind of support with their payments. The Financial Conduct Authority said those worried should get in touch with their banks as soon as possible.
However, there is a glimmer of hope on the horizon, with rates expected to fall from the beginning of 2024, although they still look set to stay above 5%, leaving many borrowers feeling the squeeze as the General Election approaches.
Experts believe property prices will fall significantly if rates remain high, because buyers will have less purchasing power. Recently collected data showed that mortgage borrowing dropped 26% in the year running up to the first quarter of 2023. Despite this, some brokers have reported are surge in mortgage enquiries with homeowners attempting to secure deals before further anticipated rises.
While many of them say another rate rise will have little direct effect on fixed mortgages, it will cause tracker mortgages, and some variable mortgages, to shoot up.
