The UK has been through another unprecedented period recently, with a third Prime Minister coming into power in as many months. Following Boris Johnson’s resignation in the summer, Liz Truss became the new PM in early September. However, after a disastrous start and a catastrophic mini-budget that devastated financial markets, she resigned after just six weeks.
The new Prime Minister is the former Chancellor, Rishi Sunak. As he becomes the leader of the Conservative Party and the nation’s new PM, forecasts about the interest rate peak in the UK have lowered. The Bank of England’s base rate is now forecast to peak at just under 5% next year, lower than previous estimates.
Relief for homeowners but still misery ahead
The data, released by Bloomberg, gives the lowest prediction of the UK’s likely interest rate peak since Kwasi Kwarteng’s mini-budget. The news will be welcomed by homeowners struggling with finances who have had to deal with a spate of rate increases since last December.
However, despite news of the lower peak, officials have said there is still misery ahead for many homeowners. One issue is that between 35% and 45% of mortgage deals are set to expire in the next twelve months, meaning sudden repayment increases will hit many mortgage holders.
In addition, the two-year energy price guarantee that the former PM implemented will now end in April after Truss had to rein in her plans. This means even more financial pressure on households, as they could also be left facing rocketing energy bills.
According to financial experts from Morgan Stanley, many of those whose deals are due to end could see their rate rise from the 2% mark to around 6%. This will mean a considerable increase in repayments and could result in many being unable to keep on top of their mortgage commitments.
On the upside, if rate increases are more subdued than initially forecast, it could mean that mortgage interest rate rises will not be as severe. According to analysts from Moneyfacts, the average rate on a two-year fixed-rate mortgage stands at 6.55%.
Data from the group also showed that lenders had pulled 60% of mortgage deals that require just a 5% deposit this year. Since the start of 2022, the number of 95% mortgages has fallen from 347 to 238, which means more significant difficulties for first-time buyers who do not have the financial means to raise a substantial deposit.
According to one broker, James Miles from the Mortgage Quarter, lenders will likely review affordability models because of soaring living costs. He said: “First-time buyers are some of the lowest income-earners in the UK and when house prices are up to 10 times the national average of wages in some areas, it has proven extremely difficult to obtain a mortgage.”
He added: “The good news is that lenders are still lending and there are enough loans, but we are seeing mortgages being taken over a longer term to ensure payments are affordable for first-time buyers. I would expect this to continue until the UK can get inflation under control which will then have a knock-on effect of rates coming back down.”