The Bank of England has just raised the base rate to 0.5%, marking the second hike in two months as it attempts to curb the rapid rise in the cost of living.
Who will this impact?
While the majority of households won’t see any change for now, the one in five borrowers who are on tracker or standard variable rate (SVR) mortgages will see their bills rise immediately.
The average first-time buyer with a 90% LTV mortgage paying a standard variable rate will see their monthly repayments rise from £814 to £840 due to the change. Meanwhile an existing homeowner with a 75% LTV mortgage on a £500k home will see their monthly bills rise by £55 each month, equating to an extra £660 each year.
What about new borrowers & those looking to re-mortgage?
New borrowers and those looking to re-mortgage their homes may also be impacted by the rate rise. Mortgage rates have been ticking up from their historic lows in recent months for borrowers with more equity, but rates on bigger LTV deals, which increased during the pandemic, have been falling.
This means that despite the base rate rise, some households whose fixed term ends this year may still be able to re-mortgage at a lower rate. Furthermore, the benefits of house price inflation and mortgage re-payments mean that households, particularly those dropping an LTV band, could see their monthly payments fall. For example, first-time buyers who purchased a year ago and paid premium mortgage rates on 90% and 95% LTV’s will not only benefit from lower mortgage rates , but they’ll also benefit from the rise in equity they’ve built up in their homes.
This means they can re-mortgage at a lower LTV bracket, reducing their monthly repayments by £242, or £2,900 over the year, Existing homeowners with more equity may also benefit from lower repayments if re-mortgaging this year.
The average buyer who bought a £1m home two years ago with a 75% LTV mortgage will see their monthly mortgage payment fall fractionally from £2,720 to £2,701, partly because strong house price growth means they will be re-mortgaging at a 60% LTV band instead of 75%.
What does this mean for the housing market?
The Bank of England have forecast that the base rate will need to rise to 1.3% by Q1 2023, before peaking at 1.5% in mid-2023, in order to curb inflation. However, a debt-fuelled global economy means that governments across the world are likely to keep interest rates low by historic standards. The Bank of England then expect to lower the base rate to 1.4% in Q1 2024.
Given the forecasted base rate increases are expected to be relatively temporary, we also think that while mortgage rates may nudge up a little, they’re likely to remain low by historic standards. Fierce competition among lenders may mean that base rate rises are not fully passed onto borrowers. Just days before the anticipated rate rise, Lloyds banking group launched a 10-year fixed rate deal at 1.66%.
Therefore, the limited scale of any further hikes is unlikely to have a material impact on future house price growth, particularly given that a record 8.2m or 53% of homeowners are now mortgage-free. Even so, we expect house price growth across Great Britain to slow to around 3.5% by the end of 2022 given the flurry last year and particularly as the cost of living crisis weighs on affordability. However, if rates rise beyond the Bank of England’s forecast, then this will dampen future price growth.
