BoE’s upcoming rate hike to significantly affect mortgage holders, economists say

Economists have said that the Bank of England’s (BoE) upcoming benchmark rate hike would significantly impact mortgage holders. The BoE reportedly will increase the rate by 75 basis points to three percent at Thursday’s rate-setting meeting.

Homeowners whose mortgages have trackers or variable rate trackers that follow the BoE benchmark rate are under more profound pressure once the next interest rate jump becomes effective. Data have shown that more than 1.5 million households are holding these two mortgage types.

U.K. Finance revealed that a household with a tracker-mortgage system would see a £73.49 ($83.88) rise in monthly repayment, or equal to £881 ($1,005.27) per year. Meanwhile, a household with a variable rate tracker would see a £46.22 ($52.73) increase in monthly repayment, or equal to £554.64 ($632.86) per year.

Rightmove’s data showed that London homeowners would face the highest hike in repayment rates compared to homeowners in other regions. The average cost for a house in London is £664,400 ($757,974.10), much higher than the national average of £354,564 ($404,552.21).

Interactive Investor personal finance analyst Myron Jobson said that the current housing market situation marginalized those who sought to purchase a home for the first time.

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“The spike in mortgage rates in tandem with rampant inflation have pushed many wannabe buyers to the sidelines,” Jobson said. “Even those able to raid the ‘Bank of Mum and Dad’ to bump up their deposit might struggle to afford mortgage repayments.”

Jobson added that second-time homebuyers also faced adversities because it became more challenging to bear a mortgage for a bigger home. Therefore, second-time homebuyers were still occupying houses that first-time buyers sought to buy.

BoE’s fight against inflation

September inflation data by the Office for National Statistics (ONS) showed that the inflation rate in the U.K. was at 10.1 percent, falling slightly from 9.9 percent in August. It was the second time the rate went beyond ten percent in 2022. Data also showed that the year-to-year increase in food prices for September was the highest in more than four decades.

In response to the data, BoE governor Andrew Bailey said that the pressures of inflation that the U.K. faced would require “a stronger response.” The central bank aimed to decrease the inflation rate to two percent through consecutive interest rate hikes. It has raised the benchmark rates from 0.1 percent during the pandemic to 2.25 percent per the last rate-setting meeting.

Although most stakeholders have expected that the BoE will do three-quarters of a percentage point hike this Thursday, economists said that some BoE officials might opt for 50 basis points to appease the financial markets. Regardless of the hike size, however, the impact of the upcoming hike to the sterling would be significant.

According to Ebury market strategist Matthew Ryan, a 50 basis points increase would be bearish for the sterling “regardless of the bank’s accompanying communications.” Ryan added that the sterling could sell off if the BoE signaled a gradual monetary tightening in the future following Thursday’s increase.

Analysts said the BoE’s Monetary Policy Committee (MPC) would attempt to strengthen its commitment to fighting inflation. Deutsche Bank chief U.K. economist Sanjay Raja added that the BoE would try to avoid setting the country’s economy back by over-correcting its rate. Deutsche Bank predicted that by May 2023, the U.K. benchmark rate would be at 4.5 percent.