A Bank of England official has estimated around 40% of UK mortgages will increase over the coming 12 months. With the central bank continuing its drive to control inflation with interest rate increases, vast numbers of homeowners will come under increased pressure.
Many households are already experiencing severe issues financially because of the soaring cost of living. Additionally, many are still recovering from the chaos caused during the height of the Covid-19 pandemic.
Sarah Breeden, executive director for Financial Stability Strategy and Risk at the Bank of England, recently addressed the Treasury Committee.
Speaking to MPs about mortgages, she said: “20% are floating so they will see the interest rate increase come through immediately. Of the 80% that are fixed, our data suggests that around a quarter of those come out of that in the next 12 months. Of that 100% stock of mortgages actually only 40% are going to see higher rates in the immediate period ahead.”
Situation not as bad as the 2008 financial crisis
Data from the financial data group Moneyfacts shows that the typical standard variable rate for home buyers in the UK increased to 5.06% at the beginning of this month. It is at its highest level since 2009, when the typical SVR was 5.14%.
While the situation may be tough on household finances, the Bank of England has said it will not be as dire as it was back in 2008 during the global financial crisis.
Bank of England governor Andrew Bailey said: “It would take a big increase, above and beyond what the market interest curve thinks at the moment, for that to happen.”
The current situation is already cooling the property market, which has been further fuelled by expectations of ongoing hikes over the coming months. With inflation soaring, many believe that the next hike from the Bank of England could be double that of previous increases, with anticipations of a 0.5% rise.
As a result, Capital Economics has predicted that property prices in the UK could drop by up to 10% as rate hikes continue. In addition, officials from the Royal Institute of Chartered Surveyors stated that the number of new enquiries from potential property buyers fell in May for the first time since autumn 2021.
Since December last year, the base rate has increased from 0.1% to 1.25% with a series of 0.25% hikes. Each of these 0.25% increases has added £16 to monthly mortgage repayments. Recent data shows that the average mortgage rate has increased by 0.5% in the last month.
Bailey did acknowledge that there are now more families that are struggling financially and are finding it challenging to keep up with bill payments. He said there had been increases in the number of people looking to rearrange their payment schedules.
However, he added that the Bank of England had to act to bring down inflation, which could take a little over two years.