The Bank of England (BoE) Monetary Policy Committee (MPC) has today voted to increase interest rates to 0.75 percent, its highest level since 2009.
Commenting on today’s decision by the Bank of England’s Monetary Policy Committee to raise interest rates by a quarter of a percentage point, StepChange Debt Charity urges policymakers to keep a close eye on the impact of higher rates on debt servicing costs, as even small changes can tip financially precarious households into difficulty.
Latest data from the Financial Conduct Authority (FCA) shows that 34% of total outstanding mortgage debt (by value) is held on variable rates – with the proportion of mortgage borrowers who have variable rate mortgages likely to be even higher than this. The FCA data shows that the average rate currently being paid by a variable rate mortgage holder is 2.9%. If this rose by a quarter of a percentage point to 3.15%, a mortgage holder with a £150,000 repayment mortgage would pay around £20 a month more.
Among those StepChange clients with a mortgage, a £23 a month increase would mean around 1 in 10 could no longer have a balanced budget or a monthly surplus, and would be pushed into a negative budget with more money going out than coming in.
Phil Andrew, Chief Executive at StepChange Debt Charity, said “Whilst a rise in interest rates might be right for the wider economy, from a consumer debt perspective many households are walking a precarious budget tightrope, as their incomes don’t stretch to cover the basics each month. These are the households that a rate rise will affect most. Policymakers mustn’t lose sight of what a rate rise means for real people on a tight budget. The fact that the wider economy can cope doesn’t always mean individual households can. Government and policymakers need to take parallel steps to ensure support is there for those who are negatively affected, especially if more rate rises are coming.”
Jane Tully, Director of External Affairs at the Money Advice Trust said “Households need to prepare now for what could be the ‘new normal’ of higher interest rates in the coming years. oday’s small rate rise will not on its own cause problems for the majority of people, and with most mortgages on fixed rates the full impact on household finances will not be felt immediately. However, we know that even a small increase in costs can be all it takes to push some households with already stretched budgets into difficulty.”
“For the first time in nearly 30 years, UK households are now spending more than they have coming in. Combined with slow wage growth and increasing living costs, interest rate rises like today’s will add to the challenges facing the many people already struggling. With advice agencies continuing to experience high levels of demand for their services, it is crucial that lenders, government and the advice sector work together to make sure people affected receive the support they need.”
Jackie Bennett, Director of Mortgages at UK Finance said “The majority of borrowers will be protected from any immediate effect from today’s increase, with 95 per cent of new loans now on fixed rates and almost two-thirds of first-time buyers opting for two-year fixed rate products over the last 12 months.”
“There is no single indicator of the cost of funds to lenders. Lenders have individual funding models, with the cost and mix of funding sources varying considerably from lender to lender. As a result, when costing their Standard Variable Rate (SVR) or reversion rates, lenders are not necessarily led by the Bank of England Base Rate so any increase or decrease in the Rate may not be passed on to borrowers.”
“Rates are still at a historic low and borrowers remain well-placed to get a good deal from the UK’s competitive mortgage market. And following an industry-wide agreement announced earlier this week, those borrowers on SVR or reversion rates who were previously unable to switch to a new product with their lender due to stricter affordability criteria now have the option to move to another product.”
“Anyone with concerns about managing their mortgage should contact their lender to discuss the advice and support available.”
Paul Broadhead, Head of Mortgage and Housing Policy at the BSA said “Today’s MPC decision means the Bank Base Rate is now at its highest level for over nine years, although interest rates still remain low relative to their historic averages. The majority of mortgage borrowers will see no immediate impact on their household finances as two-thirds of existing mortgages are on fixed rates. Transaction levels amongst home-movers are already subdued, partly because of Brexit related uncertainty. How much rates will move in such a highly competitive market remains to be seen. Savers, many of whom have seen their income decimated over the last decade will welcome the rate rise, although lenders will need to balance the interests of savers and mortgage borrowers when making rate setting decisions.”
Richard Haymes, Head of Financial Difficulties at TDX Group, said “While an interest rate rise is positive news for people living on their savings income, or holding pensions and investments, it may prove to be the tipping point for those in financial difficulty or struggling with debt. Individual Voluntary Arrangements (IVAs) have reached record levels and we expect the rate of monthly IVAs and Trust Deeds to grow by around 17% this year. A rise in interest rates will make it much harder for people in these arrangements, and there’s a risk they’ll default on their strict requirements.
“A large portion of people who are in personal insolvency hold a mortgage (over a fifth according to personal insolvency practice Creditfix), and a rate rise will obviously increase their mortgage repayments. Due to these people’s unfavourable credit circumstances, it’s likely that majority of mortgage holders in insolvency are tied to variable mortgage products, leaving them particularly vulnerable to a higher interest environment. Holders of a £250,000 mortgage will have to absorb a monthly repayment increase of £31* as a result of this 0.25% hike. Modest as it may appear to many, for people in structured debt management plans or IVAs this could have a very significant impact, even resulting in their debt solution becoming defunct or in need of renegotiation.”
Markus Kuger, Senior Economist at Dun & Bradstreet said “Today’s rate hike had been anticipated by the markets, despite inflation having fallen in recent months, as UK growth seems to have recovered from the poor performance in Q1. The effects of the rate rise will be minimal, given the Bank’s forward guidance over the past months. The progress in Brexit talks will remain the most important factor for companies and households in the near to medium term. Dun & Bradstreet maintains its current real GDP and inflation forecasts for 2018-19 and we continue to forecast a modest recovery in 2019, assuming the successful completion of the talks with the EU.”
John Phillips, Just Mortgages and Spicerhaart group operations director, says “Although a rate rise is likely to be a concern to some borrowers, when it is in increments of just .25% the number of people that are likely to have to worry about affordability is minimal, when the whole of market is considered. We have been hearing threats of another interest rate rise for a few months now, and many people have either switched or remortgaged onto fixed rate deals to negate any sudden rise to their monthly outgoings. How this latest rise will manifest itself with mortgage lenders is a big question. As we head into the final months of the year, with targets to be met, it is likely that there will still be enough good deals for those still on tracker or interest-only mortgages who want to change before another rise, which is something that has already been mooted in today’s report.”
Charlotte Nelson, Finance Expert at Moneyfacts.co.uk, “With the vast number of lenders increasing rates in the lead up to May’s rate announcement, providers have chosen to keep rates relatively static in the run-up to this one, having already been prepped for a rise. However, some lenders have increased rates, with 28 providers increasing some rates in July some more than twice. This has seen the average two-year fixed mortgage rate increase from 2.33% in November 2017 to 2.53% today.”
“Longer term fixed rates are likely to be more popular now among borrowers as they try to protect themselves from future base rate rises. This increase in demand has seen five-year fixed rates grow at a slower pace. For example, the average five-year fixed rate has increased by just 0.05% since November 2017 stand at 2.93% today. Back in February 2009, the average standard variable rate (SVR) stood at 4.83%, little changed from the average of 4.72% recorded today. The average two-year fixed mortgage rate however was significantly higher back in February 2009, standing at 4.88%, compared with just 2.53% today. Unlike in the savings market where providers are slightly slower to react to a base rate rise, borrowers on their provider’s SVR will feel the effect of the increase much more quickly.”
“This base rate increase will have a significant impact on those currently on their lender’s SVR. Based on the average SVR of 4.72%, today’s rate rise represents an increase of £28.90* to average monthly repayments, sending them soaring to a whopping £1,165.69 a month. However, with fixed mortgage rates still low in comparison, borrowers will be significantly better off switching deals now before it may be too late.”
Whilst Tej Parikh, Senior Economist at the Institute of Directors, said “The Bank has jumped the gun with the today’s rate hike. The rise threatens to dampen consumer and business confidence at an already fragile time. Growth has remained subdued, and the recent partial rebound is the least that could be expected after the lack of progress in the year’s first quarter. At present it’s unclear just how sustained any rises in pay will be, and even if we are to see strong wage growth, the impact on inflation could be limited by the need for consumers to meet borrowing costs.”
“Undoubtedly, Brexit remains a crucial factor, affecting directors’ investment decisions, while sterling is sensitive to the back-and-forth of the negotiation process. The MPC would have done well to hold off until its November meeting, allowing it to account for October’s all-important Brexit deadlines, and get a firmer grasp on the broader trend in wage increases. But in reality, the Bank had tied its hands with recent communications, and the rate hike will come as little surprise.”