Every six weeks, on a Thursday afternoon, mortgage holders in Britain brace for more bad news. This is the moment the Bank of England’s latest decision on interest rates is announced.
For a year and a half, the central bank has slashed interest rates at every meeting as policymakers try to contain high inflation. With each increase, millions of Britons prepare to put more of their money into their monthly home loan payments and cut back on other expenses.
The rapid rise in rates after a decade of low interest rates has thrown budgets across the country into turmoil. Concern is growing among affected families, donations are dwindling and politicians are gearing up for elections next year.
What’s happening to UK mortgage rates?
Many people in the UK have mortgages at rates that are only fixed for short periods, usually two or five years, in contrast to US mortgage rates, which are often fixed for 30 years. The average rate on a two-year fixed-rate mortgage has reached its highest level since 2008.
At the end of a fixed term, mortgage holders can shop around for different offers, usually choosing between a variable-rate mortgage—which can go up and down with interest rates whenever the lender decides—or choose between a variable rate mortgage and a variable rate mortgage. – or choose between another fixed-rate loan. Many people were able to get away with rates below 2 percent and are now facing stipulations above 6 percent.
Who is affected?
In the UK, one of the most direct ways that higher interest rates affect people is through higher mortgage rates, but the effect varies greatly across populations.
Just over a third of households own their home, so they will be left out of rising mortgage rates. About the same proportion rent out their homes, and many have already faced steep rent increases. The rest – 28 percent of households have a mortgage.
On average, households with a mortgage will pay around £280 (about $365) more each month if mortgage rates remain at their current level compared to March 2022 rates. According to the Institute for Financial Studies, The research organization said that those below 40 years of age will bear the burden more.
When will it take effect?
To some extent, luck – or bad luck – will determine how painful a jump in mortgage rates will be for a home, as it will depend on when the fixed-term rate expires.
The decade-long shift among home buyers from variable rates to fixed-rate mortgages means that many people don’t immediately realize the higher interest rates. But the longer rates stay high, the more people will need to sign up for higher fixed rates.
The Bank of England estimates that by the end of this year, around three million mortgage holders will experience an increase of up to £500 ($650) a month on their payments.
Around 4.5 million households have seen an increase in payments since the Bank of England started raising interest rates in December 2021, and another four million will be hit by higher rates until the end of 2026, the bank said. But the central bank estimates that the financial burden will still be less than that of the 2008 financial crisis.
“It’s a difficult situation facing individual households that are having to refinance,” said David Muir, a senior economist at Moody’s Analytics. “They are, in some cases, facing a very sharp increase in payments, as interest rates have gone up to a much higher level than initially fixed.”
Mr Muir said this would reduce their spending power and affect the country’s economic growth. But UK households are less indebted than they were during the financial crisis, so there is less risk of repayment and lenders are better able to help, he said.