- Increase in base interest rate tipped to continue
- Experts predict the beginning of the end of ‘uber-cheap’ mortgages
- Warning higher repayments could lead the poorest into debt cycle
- Better deals expected for savings accounts – at some banks
The first interest rate rise in a decade is set to hit millions of homeowners to the tune of hundreds of pounds a year, experts have said.
Thursday’s decision to raise the record-low rate – which anchors mortgages and savings accounts and governs the cost of lending – to 0.5% should, act as a wake-up call, advisors warned.
The Bank of England’s Monetary Policy Committee voted to move rates up after 10 years amid “headwinds” in the British economy.
“The time has come to ease our foot a little off the accelerator,” Bank governor Mark Carney said.
Not a one-off event
But analysts warned the Bank’s suggestion that Thursday’s rise will not be a one-off event and that further hikes over the next three years could hit thousands currently on variable rate mortgages.
The increase could cost some of those customers as much as £200 a year per £100,000 of outstanding borrowing.
“Everyone should check to see if they’re overpaying,” Martin Lewis, founder of MoneySavingExpert.com, said.
Lewis shared his fears that the move could provide cover for big lenders to sneak through their own hikes.
“Do not be surprised if some lenders use this move as an opportunity to sneak rates up further maybe 0.3%,” he said.
The beginning of the end of ‘uber-cheap’ mortgages
“The bigger picture though is this is likely to be the beginning of the end of uber-cheap mortgages,” Lewis added. “New fixes [fixed-rate mortgages] are already a tad costlier as the market’s anticipated rate rises; yet for now, deals are still incredibly cheap.”
Millions more could be whacked by higher rates when their fixed-rate deals end.
First time buyer Ricky Skinner, 32, from Bristol, is one of the millions who’ve never experienced a rate rise. He was advised to “lock-in” the record-low rate with a fixed product over the summer.
“Buying a house is already terrifying but this just adds to it,” he told HuffPost UK. “Luckily we sought advice through a broker who assured us a fixed-rate deal was best. That advice has paid off.”
But Skinner is only assured of his rate for the next two years, after which his 95% deal will be up for renewal.
“Our plan now is to save as much as possible, lowering the loan amount and getting a better rate as a result.”
Almost half of homeowners have never experienced a rate hike
Charities have warned higher mortgage payments could lead the poorest into a vicious cycle of debt.
And Harry Rose, Which? Money editor, said: “Almost half of homeowners have never experienced an interest rate hike – raising important questions about how well prepared they are for the impact it could have on their finances.
“As consumers feel the pinch, it is vital that banks, lenders and utility companies offer help to at-risk customers to ensure they receive all the support they need to cope with this rise.”
However Robert Gardner, chief economist at Nationwide Building Society, said consumers need not panic about further rises just yet.
He told HuffPost UK: “The hike only returns Bank Rate to the level prevailing before the Brexit vote last year, and, given the uncertainties ahead, rates are only likely to rise gradually and to a limited extent, if at all, in the years ahead.”
And Raj Badiani, director of economics at IHS Markit, told HuffPost: “We believe the pressure for further interest rate hikes in early 2018 is expected to subside.”
Better deals for savings accounts – for some banks
The rise in rates will also impact savings accounts, with better deals expected.
But the full 0.25% isn’t guaranteed to be passed onto savers. The TSB bank said it would only offer people an 0.15% rise in interest on balances after Thursday.
Pensions will also receive a boost, with longer-term annuities strengthened by the rise, benefitting those approaching retirement.
The last time interest rates rose was in July 2007, when Tony Blair was still Prime Minister.
Rates reached a record-low of 0.25% in the wake of last June’s Brexit vote.