Every six weeks at noon on Thursdays, UK mortgage holders brace for more bad news. It’s time for the Bank of England’s latest decision on interest rates to be announced.
For a year and a half, the central bank has raised interest rates at every meeting as policymakers try to calm high inflation. With each increase, millions of Britons are preparing to pour more money into their monthly mortgage payments and refrain from other expenses.
A decade of low interest rates followed by a sharp rise in interest rates has upended budgets across the country. Vigilance is on the rise among affected households, scant philanthropy and politicians ahead of next year’s elections.
What’s Happening to UK Mortgage Rates?
Unlike US mortgage rates, which are often fixed for 30 years, many people in the UK take out short-term, fixed-rate mortgages (usually 2 or 5 years). Average interest rates on two-year fixed-rate mortgages rose to their highest level since 2008.
After the fixed term ends, the mortgage holder can consider different offers, usually a variable rate mortgage (which can go up or down depending on the lender’s decisions and interest rates) or another fixed rate loan. Choose either Many dropped out at rates below 2% and are now facing conditions above 6%.
Who is Affected?
In the UK, one of the most direct effects of rising interest rates on people is higher mortgage rates, but the impact varies widely across the population.
More than a third of households are outright homeowners, shielding them from rising mortgage rates. About the same proportion are renting their homes, and many are already facing significant rent increases. The remaining households (28 percent of households) have mortgages.
On average, if mortgage rates remained at current levels, households with mortgages would pay about £280 (about $365) more each month. Compared to March 2022 interest rates, According to the Institute of Finance. According to research institutes, the burden will be even greater for people under the age of 40.
When will it affect me?
To some extent, how painful rising mortgage rates will be for households depends on luck or misfortune. That’s because it depends on when the fixed interest rate expires.
A decade-long shift in homebuyers from floating rate to fixed rate mortgages means that many aren’t feeling the rise in rates right away. But the longer interest rates continue to rise, the more people will need to sign on for higher fixed rates.
The Bank of England estimates that about 3 million mortgage holders will see an increase in payments of up to £500 ($600) a month by the end of this year.
About 4.5 million households have already seen their payments increase since the Bank of England began raising rates in December 2021, and another 4 million households will be affected by the hike by the end of 2026, the bank said. . The burden he will still be lower than during the 2008 financial crisis.
“It’s a tough situation facing individual households facing pressure to refinance,” said David Muir, senior economist at Moody’s Analytics. “As interest rates have risen significantly compared to the original fixed rate, we are facing very steep increases in payments in some cases.”
Muir added that it would reduce their spending capacity and weigh on the country’s economic growth. But as UK household debt is lower than during the financial crisis, the risk of foreclosure is low and lenders can better help, he said.
