Credit, Collections & Insolvency News
The Bank of England has raised interest rates from 1.75% to 2.25% and indicated that Britain’s economy is now in recession.
A majority of the Bank’s nine-member monetary policy committee voted to increase the key base rate by 0.5 percentage points, judging that the risks of inflationary pressures becoming entrenched outweighed the short-term dangers to the economy.
The central bank had previously expected the economy to grow between July and September but it now believes it will shrink by 0.1%. The Bank’s seventh rate rise in a row takes borrowing costs to their highest level since 2008
Commenting on the rise, Joanna Elson CBE, Chief Executive of the Money Advice Trust said “Rising prices are already having a severe impact on millions of people and tackling high inflation is important in reducing the pain many households are experiencing.”
“Today’s further increase in interest rates, however, comes at a time when millions of peoples’ budgets are already at their limit. Our findings show that five percent of UK adults say they are struggling to meet mortgage repayments, and for many homeowners, this rise will add to their concerns. For those on variable mortgages, the challenge is more pressing. With repayments likely to rise immediately, this will heap more pressure onto many already precarious situations.
“Anyone worried about their mortgage repayments should contact their lender. Creditors also need to ensure people struggling to pay are treated fairly, including offering payment deferrals and pausing collection activity when appropriate.”
Paul Heywood, Chief Data & Analytics Officer at Equifax said “Today’s hefty hike by the Bank of England highlights the severity of our situation. Despite inflation dropping slightly to 9.9%, the figure is still at an eyewatering level that is bringing a real pinch to people’s pockets.”
“With winter fast approaching, UK households are concerned about being able to afford the basics like heating their home despite government plans to cap energy bills. Our data shows that a significant portion of UK adults are already behind on their household bills and are relying on credit for daily and essential spending. The shocks of today’s rate rise will also be felt by the 1.9 million people on a variable or tracker mortgage1 and the millions of other homeowners waiting to fix their mortgages for an extended period. We know that many across the UK will be watching nervously as repayments creep up month after month.”
“In these times of significant financial pressure, we are working with – and calling on – all lenders to pay close attention to their customers’ repayment behaviours through open banking. Where possible, the industry must act early to help customers that show signs of being in difficulty. We also encourage customers facing difficulties to feel empowered to speak to lenders, as this information can help to find solutions rather than struggling in silence.”
Richard Lane, Director of External Affairs and of StepChange Financial Solutions, the mortgage broker subsidiary of StepChange Debt Charity, said “It’s always true that debt can cause problems for anyone, even though the concentration of problems tends to be most acute among those on the lowest incomes who are typically tenants. Right now, though, it’s home-owners who are likely to be feeling a rising sense of dismay at their affordability prospects as interest rates continue their upward march. If you’re worried, don’t hesitate to contact your mortgage lender and to contact StepChange for advice and help – the earlier you take action, the more likely it is that you can avoid more serious debt problems.”
Andrew Montlake, Managing Director at mortgage broker, Coreco said “There’s no doubt that a 0.75% rate increase will make many prospective buyers think twice, either about the value of the property they’d like to purchase or whether they are prepared to buy now full stop. Even though rates will still be low historically, a lot of people who have only owned post-Global Financial Crisis will be starting to feel very exposed. Some would-be upsizers may down tools and choose to sit tight for the time being. For first-time buyers, the psychological impact of even a 0.75% rate rise is likely to be less pronounced as their alternative is the rental market, where prices are off the scale. Even if rates rise to 2.5% and beyond, for many it will still be cheaper to own than to rent. There is talk that prices will fall as rates rise, but I think this is unlikely, unless the economy enters a deep and protracted recession. We are more likely to see the rate of price growth fall, and perhaps even flatline, during the year ahead. As ever, the lack of supply will act as a glass floor under the property market.”
Nitesh Patel, Strategic Economist at Yorkshire Building Society, said “The latest rate rise of 0.50% was totally expected by most analysts with inflation edging further upwards. This is the seventh consecutive rate hike since last December as the Bank strives to bring inflation under control. Higher rates typically take 18 months to impact households and businesses, so some of the earlier increases may not have any impact on bringing inflation down until next year. An important point here is that 80% of the outstanding mortgage stock is on a fixed rate and the five-year fixed rate deals taken out in the bumper year of 2018 will come up for renewal in 2023, which is close to two million households. So, from next year many households will be faced with higher monthly payments.”
“The outlook for further hikes depends on where inflation peaks. The energy price guarantee is expected to keep inflation around 4 per cent lower than it would have been without the scheme. However, the scheme will provide a large boost to the economy and likely to be inflationary, so further rates rises can be expected.”
John Phillips, National OperationsDdirector at Just Mortgages said “There was a certain inevitability to this latest 0.5% bank base rate rise although it’s worth noting that three of the MPC members voted for an even greater rise of 0.75% which would have taken us to 2.5%. That will however be no consolation to those watching their mortgage payments rise or seeing the sub four percent mortgage product they wanted being withdrawn from the market.”
“Our brokers across the country tell us that remortgage business is continuing to gain momentum and with interest rates rising to 2008 levels and with no sign of stopping it’s easy to see why. Although house price growth is robust with year-on-year growth in excess of 15% borrowers are looking to secure an affordable rate rather than release equity in their homes.”
“Rising house prices do offer something of an equity-based safety net to homeowners but this is often just a value ‘on paper’ and affordable and sustainable monthly payments is far higher on the list of household priorities. As the impact of fuel, food and energy price continues to hit the role of mortgages brokers will become more and more crucial.”
Richard Pike, Chief Sales and Marketing Officer at Phoebus Software, said “This was probably the worst kept secret this week, that and the expected cut to stamp duty tomorrow. While we were expecting it this rise, although not the 0.75% that many had touted, is one that will add further pressure to finances that are already under so much pressure with the rising cost of living. Savers will of course see the difference in a positive way, but it is mortgage borrowers that will taking the brunt of this increase.”
“In his fiscal event tomorrow the Chancellor will have a chance to ease the burden, but for anyone on an SVR the cost of their mortgage is the one thing that he will be unable to affect now that the Bank of England has put rates up again. The focus for mortgage lenders must be on affordability and using all the tools at their disposal to ensure they are keeping track and identifying struggling borrowers. Acting now could save a lot of unnecessary anguish down the line.”
Andrew Gething, Managing Director of MorganAsh said “In the current climate, it should come as no surprise to see the Bank of England raise interest rates for the seventh time in a row up to 2.25 per cent.”
“It will undoubtedly feel like another blow for borrowers, house buyers and mortgage holders, especially those coming to the end of a fixed rate term who will be looking at a hike in rates, or those with tracker mortgages or on Standard Variable Rates.”
“As the cost-of-living crisis continues to bite and more consumers potentially struggle to keep up with payments, a further rate rise could push more consumers into the ‘vulnerable’ category. It’s an important reminder to the sector to ensure systems are in place to identify when customers are vulnerable and protect those who are.
“As homeowners explore their options and many fixed rate mortgages mature in the coming months, identifying and monitoring vulnerable characteristics will become just as important as affordability checks or finding the right criteria. After all, brokers and lenders are duty bound by the upcoming Consumer Duty regulation to ensure they deliver good outcomes for customers.”
“That means if bank rates do continue to rise this year as expected, businesses must pay extra attention to monitoring consumer characteristics throughout the customer journey and the life cycle of the product.”
Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “This is the kind of agonising squeeze that borrowers have been dreading, The Bank of England has tightened rates another notch – piling the pressure on borrowers, who haven’t seen rates like this in 14 years. It’s racking up extra interest charges at a time when we can least afford them. Savers, meanwhile, will welcome the return of higher rates, but not if they’re stuck earning less than half a percent interest in an easy access account with one of the big high street giants.”
“The Bank of England now expects inflation to peak lower than it previously predicted, at 11% in November. The Energy Price Guarantee has been instrumental in controlling headline inflation, and protecting it from the rollercoaster of international energy prices. However, it wasn’t enough to convince them that rising prices will come under control without another sizeable rise.”