Since December 2021, the Bank of England has imposed a series of interest rate hikes. This has taken the base interest rate from just 0.25% last December to 1.75%, with the latest hike being a super-sized one of 0.5% compared to the previous 0.25% hikes. The rises come as the central bank tries to bring soaring inflation under control, but it is set to have a significant impact on the finances of mortgage borrowers.
Officials from UK Finance have said that many of those coming out of fixed rate mortgage deals could face a mortgage bill shock when they remortgage. According to the group, many could find themselves hundreds of pounds a year worse off, and the impact will be worse if interest rates continue to rise.
Many on fixed rate deals that are coming to an end took them out when rates were at record lows, but when they come to remortgage, they will now have to do so at a far higher rate of interest.
An unusual move for the central bank
Personal analyst at Bestinvest, Alice Haine, said it was unusual for any central bank to increase interest rates when the nation was teetering on the brink of a recession. However, she noted that various circumstances had led to these decisions.
She said: “It is unusual for a central bank to raise rates when the economy is at risk of falling into recession. But the country is in the throes of a cost of living crisis as global challenges such as the war between Ukraine and Russia push food and fuel prices to skyrocketing levels.”
She added: “The worrying effect of higher mortgage payments is that people have less disposable income to spend at a time when household finances may already be stretched.”
Many homeowners will be affected by the rate hikes implemented over the past eight months, including existing mortgage payers and those looking to take out their first mortgage. Those who have been on a fixed rate deal for some time will suddenly find that their outgoings rocket when they have to take out a new mortgage at a higher rate.
Personal Finance Manager at AJ Bell, Laura Suter, said: “Anyone who comes to remortgage in the next couple of months faces a huge shock of their rising monthly costs. Someone coming out of a two-year-old would have gotten his last mortgage when rates were much lower.”
Many households are already struggling financially because of soaring living costs, and further base rate increases will put additional financial pressure on many households.