Interest rates in the UK were boosted by 0.5% by the Monetary Policy Committee of the Bank of England (BoE) on Thursday, rising from 1.25% to 1.75% as part of an effort to battle the highest rates of inflation in 40 years, with the Bank updating its forecast to suggest rates will hit 13% before dropping.
This widely predicted increase represents the biggest single increase in interest rates since Gordon Brown handed control of interest rates to Threadneedle Street in 1995.
Rates hitting 1.75% also marks their highest point since the global financial crisis in 1995.
The Monetary Policy Committee voted by a majority of 8-1 to increase #BankRate to 1.75%. Find out more in our #MonetaryPolicyReport: https://t.co/389XbdQZWf pic.twitter.com/OcqtaWjFuX
— Bank of England (@bankofengland) August 4, 2022
Ahead of the rate rise, Rightmove suggested that a 0.5% rise means new first-time buyers will see monthly mortgage payments increase to an average of 40% of their gross salary, a level not seen since 2012. The average monthly mortgage payment for new first-time buyers would increase to over £1,000.
“First-time buyers trying to get onto the ladder are currently facing average monthly mortgage payments that are 20% higher than the start of the year due to rising interest rates and asking prices, and that’s assuming they’ve been able to overcome the hurdles to raise a large enough deposit,” said Tim Bannister, Rightmove’s Housing Expert. He added that a new record first-time buyer asking price of £224,943 means that a 10% deposit for such a property is now “57% higher than it was ten years ago, while average salaries have only increased by 31%”.
However, Nathan Emerson, CEO of Propertymark, was less concerned:
“Buyers will be watching interest rates very closely, but the gradual nature of their upward trajectory from a historically low base is unlikely to be a factor that on its own has too much of an effect on the confidence of those who are serious about moving.
This is borne out by our own data which shows potential buyers registering with our member agents have outnumbered new property listings throughout the first six months of the year, and by seven to one in June alone. During the same period the Monetary Policy Committee has raised the base rate four times.”
Simon McCulloch, Chief Commercial & Growth Officer at Smoove, said:
“It should be remembered that today’s hike comes hot on the heels of the Bank of England scrapping the affordability test for mortgage customers from the beginning of August so there’s mixed news for home movers. First Time Buyers in particular will find it increasingly difficult to find an affordable loan following today’s news, although demand remains high and the market continues to perform strongly.”
Cecilia Mourain, Managing Director for Homebuying at Moneybox, urged homebuyers to keep such rate rises in context, adding that they can seem “daunting”, but that there was a sharp decline in 2020 and rates still remain in line with the past 10-year average. “Where possible, aspiring homeowners need to dissociate as much as possible from what’s happening in the very short term, and try to focus on the long term benefits of home ownership. There will always be periods of recessions and then periods of growth, the key is to be in it for the long term,” she added.
CEO of Octane Capital, Jonathan Samuels, commented:
“The Bank of England has acted forcefully in response to inflationary pressures with the largest base rate hike in over a quarter of a century and this is going to further rock what is already a very unsettled mortgage sector.
While they walk the tightrope between curving inflation and avoiding recession, it’s the nation’s homeowners who can expect to pay the price with the monthly cost of their mortgage due to continue climbing.”
Director of Benham and Reeves, Marc von Grundherr, added:
“Those of us old enough to remember the nineties may view today’s jump as no reason to run for the hills just yet and it is important we remember that rates remain comparably low to historic levels.
However, it will certainly alarm a generation of homeowners who have known nothing other than a sub one percent base rate since purchasing their home and are now facing an end to this sustained period of mortgage affordability.”
It was also revealed on Wednesday that Liz Truss, one of two remaining candidates to become the next prime minister, said she would look to hand control of inflation to the Bank should she be elected. She said that “the best way of dealing with inflation is monetary policy… I want to change the Bank of England’s mandate to make sure in the future it matches some of the most effective central banks in the world at controlling inflation”.
