£50 a month jump in average mortgage costs after rate rise

The Bank of England has raised its base rate by 0.50 percentage points, taking it from 1.25% to 1.75% (Joe Giddens/PA) (PA Archive)

The Bank of England has raised its base rate by 0.50 percentage points, taking it from 1.25% to 1.75% (Joe Giddens/PA) (PA Archive)

Homeowners whose mortgages directly track the Bank of England prime rate will typically see around £50 per month added to their costs, according to industry estimates.

The Bank of England raised its key rate by 0.50 percentage points on Thursday, taking it from 1.25% to 1.75%, marking the biggest single rate jump since 1995.

The £50.43 increase was calculated by trade association UK Finance and is based on the average mortgage balance.

This adds up to an extra £605.16 in mortgage costs over a year.

Some homeowners who are nearing the end of their terms face a shock when it comes to refinancing

Simon Gammon, Knight Frank Finance

Simon Gammon, managing partner at Knight Frank Finance, said: “Mortgage rates now change on a daily basis and lenders give borrowers and brokers little notice of repricing.

“We see two significant consequences for borrowers. First, some homeowners who are nearing the end of their terms face a shock when it comes to refinancing because they are unable to borrow as much as they had hoped.

“Secondly, those looking to buy are realizing that once available properties are now out of reach.”

There are almost nine million outstanding mortgages, according to UK Finance.

Around three-quarters of these are fixed-rate mortgages, which will not be affected by changes in the base interest rate.

However, variable interest rate agreements may increase as a result of base rate increases.

Around one in 11 (9%) outstanding mortgages are trackers, while around one in eight (12%) are standard variable rate agreements (SVR).

Borrowers may end up on an SVR when their first mortgage agreement ends. SVR is determined by the individual lender.

Fixing longer may be in the mindset for some, as there is anticipation of further prime rate increases to come

Rachel Springall, Moneyfacts.co.uk

A 0.50 percentage point increase on today’s average SVR could add around £1,400 to home owners’ mortgage payments over the next two years, according to Moneyfacts.co.uk.

The calculation is based on a mortgage of £200,000 to be repaid over 25 years.

The average SVR is currently 5.17%, according to Moneyfacts’ records.

Rachel Springall, a finance expert at Moneyfacts.co.uk, said those on an SVR may find they can save on their mortgage costs by locking in a fixed rate loan.

Based on current average mortgage rates across the market, someone switching from an SVR to a two-year fixed-rate mortgage could save around £3,300 over two years, also based on a £200,000 mortgage repaid over a 25-year term, Ms Springall said .

She continued: “Fixing longer may be in the mindset for some as there is anticipation of further prime rate rises to come.

“Consumers will find that the average five-year fixed rate has broken 4% and the interest rate gap between this and the average 10-year fixed rate has closed since December 2021.

“The cost of living crisis, interest rate increases and house price growth can price out potential buyers if they have little disposable income and then eat into their savings.

Finding the right combination of rate, fee and criteria will be crucial

David Hollingworth, L&C Mortgages

“On the other hand, mortgage customers may find they have more equity in their home but will need to get some independent advice on whether they can afford to switch deals.”

David Hollingworth, associate director at L&C Mortgages, said he is seeing an increasing proportion of borrowers lock into new mortgage rates up to six months before their current rate expires.

He added: “Finding the right combination of price, fee and criteria will be critical to finding the right option to help manage what will typically be the largest single outbound.”

First-time buyers may also find it more tiring to get on the property ladder.

Property website Rightmove estimated that new first-time buyers’ monthly mortgage payments could be equivalent to an average of 40% of their gross wages – a level not seen since 2012.

Rightmove said first-time buyers typically face a deposit of £22,494 for a home, based on current asking prices, compared with £14,316 a decade ago.

Tim Bannister, Rightmove’s housing expert, said: “A new record (average) first-time buyer asking price of £224,943 means that a 10% deposit for a first-time buyer’s home is now 57% higher than it was 10 years ago , while average wages have only increased by 31%.”

Loyal savers, meanwhile, cannot benefit from the latest string of prime rate rises – and could miss out on a better return if they fail to compare deals and switch, Moneyfacts said.

The average easy access savings account on the market in August paid 0.69%, up from 0.18% in August 2021.

Easy access Isas, meanwhile, typically pay 0.76% in interest, up from 0.24% in August 2021.

Mr Springall said: “The patience of some savers may be wearing thin, but there is no guarantee they will see any benefit from a prime rate rise. Fortunately, challenger banks and building societies continue to compete in this area.”

(PA Graphics) (PA Graphics)

(PA Graphics) (PA Graphics)

Households are coming under increasing pressure from a series of bill rises – and the Resolution Foundation think tank has warned that inflation could reach 15% in the first quarter of 2023.

The latest base rate rise was announced on the same day Ofgem confirmed the energy price cap will be updated quarterly, rather than every six months, as it warned customers face a “very challenging winter ahead”.

Figures from the Bank of England published last week showed that household credit card borrowing rose in June at the fastest annual rate since 2005, while the amount of money deposited into accounts rose sharply.

Cost of living support, including £400 off household energy bills plus targeted support for those who are particularly vulnerable, will be rolled out in the coming months.

Rebecca McDonald, chief economist at the Joseph Rowntree Foundation, said: “Incredibly high inflation is going to hit low-income families hard.

“We already know that seven million low-income families had to sacrifice food, heating, even showers, this year because they couldn’t afford it.

“Many also took out credit to pay their bills and fall behind on their payments. This will be much more difficult to pay off with higher interest rates, putting more families at financial risk.”

Robin Fieth, chief executive of the Building Societies Association (BSA), said: “Lenders are sensitive to the growing number of people facing household budget pressures.

“Anyone concerned about their ability to pay their mortgage should contact their lender early and they will do everything they can to help.”

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