Bank of England

Bank of England announces new interest rate rise

The Monetary Policy Committee of Bank of England announced on 11th May that the interest rates in the UK have increased to 4.5%, a quarter rate rise from 4.25% – the highest level in almost 15 years.

The Bank has raised its base rate for the 12th time in a row since late 2021 in an effort to control soaring inflation. Inflation for March was at 10.1% which has come down from February, which sat at 10.4%

The Bank’s target for inflation is 2% – it is five times above that rate currently. The base rate has risen from 0.1% in December 2021 to 4.25% when the rate was last increased in April.

How the industry reacted?

“Over the last couple of weeks, average fixed-rate mortgages have been slowly edging up in anticipation of today’s rise of 0.25% in the Bank of England Base Rate. There is unlikely to be any immediate changes in lender rates based on today’s decision, and lenders are instead likely to wait to see what the impact of the Bank’s comments on the outlook of the economy have on swap rates. An average five-year fixed 85% Loan-To-Value mortgage rate is now 4.52%, up from 4.44% last week,” said Rightmove’s mortgage expert Matt Smith. He continued:

“To put this into context, this amounts to a difference of £14 a month for someone purchasing an average property and spreading the cost over 25 years. So, while we may continue to see fixed-deals fluctuate slightly up or down in the short-term, buyers coming to market soon may find that the amount they need to repay each month doesn’t change significantly.”

“For those on fixed rate mortgages, this latest increase is likely to have no immediate effect, and for those looking for a new fixed rate, they should also see little change in the market offering due to it being already factored into banks’ pricing,” said Nathan Emerson, Chief Executive for Propertymark, the professional body for property agents. He continued:

“However, for those on tracker mortgages, like many landlords in the buy-to-let market, this means another rise in outgoings. In the rental sector, a rise in the cost of supplying a home will put further pressure on rents and may see some investors forced to exit the market altogether, further worsening the extreme supply and demand imbalance seen already.”

Group Chairman of Cornerstone Tax, David Hannah, stated that it was a “complete mistake to raise interest rates again” and that it might “tip the economy into recession”. He added:

“We’ve just witnessed the introduction of the 100% mortgage for renters, which means they’ve got no equity. Now we’re raising interest rates, putting pressure on affordability, which increases the risk of a property price decline also meaning that those 100% mortgages are going to be in negative equity. Homeowners coming off fixed rate deals and moving straight into a five and a half percent mortgage are going to be unable to afford them. That’s going to lead to a load of repossessions and forced sales which is not good news. That’s going to shatter confidence in the market.”

Andy Sommerville, Director at Search Acumen, said:

“The government’s fiscal policy continues to be largely dictated by the Bank of England and their goal of cooling market activity. This will be a blow not just to those looking to re-mortgage and struggling first-time buyers, but also to the commercial real estate sector, where the escalating cost of debt is starting to have massive implications on site viability. Coupled with rising costs of goods and fuel, and a struggling labour market in construction, it’s becoming clear that this may continue for longer than some either predicted or hoped, as the inflation fire continues to burn.

The effect on transaction volumes will be evident in the months that follow. Property lawyers may feel more pressure to compete for business, in which digital excellence as a competitive advantage will ensure greater transaction resilience, speed and efficiency. Until the industry adopts wholesale digital reform however, economic headwinds will continue to test market resilience with greater impact, from protracted transaction lengths to higher fall-throughs.”

Adrian Anderson, Director of property finance specialists, said:

“Stubbornly high inflation has seen interest rates continue to soar for well over a year and the landscape has changed once again since the last MPC meeting in March, offering a bleaker outlook for inflation as banks raise mortgage rates and tighten their lending criteria meaning many cannot borrow as much as they could this time last year.

After 14 years of historically low mortgage rates, today’s announcement is more bad news for many existing homeowners. The cost-of-living crisis coupled with the prospect of higher mortgage payments has prompted an increase from clients looking to move to interest-only mortgages in an attempt to soften the blow.”

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