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The Truth about the Mortgage Hike

Vicky Parry 31st Jan 2022 No Comments

Reading Time: 4 minutes

You can’t have failed to notice that rates are set to rise imminently, sparking mortgage misery and tax pressure, but we ask if the mortgage hike is quite what it seems. With the market pricing in an interest rate rise to 0.5% on Thursday, rates are predicted to hit 1% by summer and 1.25% by the end of 2022.  But what does this mean for the financial markets, and for borrowers, savers and tax?

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, says, “The nervousness rippling through the financial markets about the prospect of rate rises is unlikely to abate this week, ahead of the Bank of England’s monetary policy committee meeting.  Policymakers have wrong-footed the market before, and there is always a chance they could do so again. But with the Omicron variant a short, sharp shock, rather than lingering malaise for the economy, and jobs numbers so buoyant, it is likely that keeping a lid on inflation will still be the biggest factor concentrating minds around the table.

Companies reliant on big borrowing to fuel their growth plans have been highly sensitive to expectations that the era of cheap money is coming to an end. Housebuilders have also been on the back foot, amid concerns that succession of rate rises could lead to a cooling of the hot housing market. Banks though have been more resilient, with the prospect of their loan businesses becoming more lucrative. Investors will be watching closely for comments from policymakers about the direction of future rate rises, and an indication  that more will come sooner rather than later is likely to accelerate these trends.’’

Mortgage hike

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, says, “The idea behind rate rises is to ease inflation and alleviate the cost-of-living crisis, but for anyone facing a horrible combination of higher mortgage payments and rising taxes, it could do the precise opposite.

It would be incredibly difficult for the Bank of England to sit on its hands after inflation reached its highest point for 30 years, so the market is pricing in a hike this week.

Whether it will have the desired effect on inflation remains to be seen. It’s difficult to see how it will control some of the biggest price rises – including energy and petrol – which are driven by global supply problems. However, it will make many borrowers worse off, which could help temper inflation in some areas.

What Jasmine Says

“The market is pricing in a rise in interest rates to 0.5% on Thursday, and it’s certainly something that I have also assumed would happen this week.

“However, the Bank of England has proved itself an ‘unreliable boyfriend’ a few times in recent months. The market (and I) expected a rate rise in November but didn’t get one. Then, when everyone assumed that nothing would happen in December, because…well…it’s December…we got a surprise rise (albeit a tiny one).

“So while it would seem reasonable to assume another, small, rate rise on Thursday it’s by no means in the bag. The cost of living is rising at an alarming rate, households are already struggling to pay basic bills, so putting rates up, which would increase borrowing costs for millions (and wouldn’t do much for savings rates), may be something that the Bank will shy away from. However, from an economic point of view it seems clear that rates will have to go up even if incrementally over the next couple of years, so it’s not a question of ‘if’ but ‘when’ they will be put up next.”

Borrowers on variable rate mortgages or those remortgaging to a new fixed rate will be affected almost immediately, with the initial rate rise following quickly on the tail of the last hike, and feeding into mortgage deals ever since.

The Bank say they are going to try and raise rates “slowly and steadily,” says Sarah Coles, “which could control things somewhat, but that just won’t have the same impact if we’ve fixed our mortgages for years, because we’ll face the consequences of all these rises at once. So, for example, if someone currently paying 1% on a £200,000 mortgage over 25 years remortgaged at the end of the fixed period to a new deal costing 2%, it could push up their monthly costs by £94.

There’s no guarantee that any rise would be passed onto savers – the last one didn’t persuade the high street giants to budge an inch on easy access accounts. We’ve seen some sluggish movement on other accounts – and a few higher rates will kick in from 1 February – but only a tiny fragment of the market has passed on rate rises in full.

However, the last rise helped the banks boost their margins, so they’re in a slightly different position now. The more rises we get, the more likely we are to see rates tick up even among the most reluctant institutions. Very few will do so in full, and most will take their time about it, so the best deals will be available to those who are prepared to shop around.

You may be tempted to hold on for a better rate instead of fixing. But you have to decide what you’re waiting for, and when you’ll stop waiting and fix. Will it be enough for you if the Bank of England raises rates to 1%, or will you be tempted to hold out in the hope of 1.25% at the end of the year? If so, how much interest will you have missed out on in the interim?

The other horrible side-effect of hiking Bank of England rates is that it will make borrowing more expensive for the government. This, in turn, risks hardening opposition to pressure to shelve the National Insurance hike.’’

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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