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Pricing in a rate rise

Shortly before Christmas, the Bank of England raised the base rate from 0.1% to 0.25%. This fi rst upward move in more than three years was a sign that the Bank is now intent on curbing inflation, which surged to 5.1% in November. This was a 10-year high.

The members of the Bank’s Monetary Policy Committee voted 8-1 in favour of the increase, in a surprising show of unanimity. They said that further “modest” rises could be necessary in the months ahead to bring inflation back towards the 2% target.

What are the implications of the Bank’s new stance for the property market? The majority of existing homeowners will not immediately face additional costs as a result of the rate rise, since close to three-quarters of mortgage borrowers are on a fi xed-rate deal. Since 2017, the availability of record-low deals has encouraged as many as 96% of new borrowers to opt for a fi xed-rate loan.

However, borrowers with tracker or standard variable rates (SVR) loans will start to pay more this month. UK Finance statistics indicate that about 1.1m borrowers are on an SVR, although many only pay this higher charge for a short period while moving between discounted loan off ers. In February Halifax’s SVR, currently at 3.59%, will increase to 3.74%.

The possibility of a base rate rise caused some lenders to launch more expensive fi xed-rate loan deals in the fi nal months of 2021, although competition between lenders may mean increases are not passed on in full to borrowers.

However, the impact of these increases depends on the type of borrower, as the table on the opposite page highlights. If the base rate increase is fully passed on, the average fi rst-time buyer, who has a cheaper home but borrows a higher proportion of the purchase price, could see their monthly repayment on a 2.91% deal goes up from £994 to £1,011. This adds up to an extra £204 over a year. But, over a 25-year term of a loan, it amounts to an extra £5,100.

Borrowers who are on the next steps of the ladder tend to have more expensive properties, but lower debt. Their average monthly repayment will rise by £13, or £156 a year.

There are likely to be more base rate increases in 2022, but mortgage rates are still likely to stay low by historic standards. In November 2021, the average rate on a two-year fixed deal for a borrower seeking a 60% loan was 1.3%, the same level as in November 2019 when the base rate stood at 0.75%.

However, if the base rate were to be raised to 1.1% - its highest level since early 2009 - the monthly repayment for borrowers on the next steps of the ladder would rise by £91, or £1,092 a year.

Around half of current mortgage holders have never seen the Bank of England base rate rise above 1%. For these borrowers, the next couple of years may mark the fi rst time that they have seen mortgage rates rise, even if they remain very low by historical standards. The other half of borrowers however, who are much closer to paying down their debt, will still remember base rates hovering above 5% during the mid-noughties. While it’s likely rates will drift upwards over the next year, in all likelihood, they will remain a fraction of where they were on the eve of the 2007 crash.

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Market Insight Winter 2021/2022

Market Insight Winter 2021/2022

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