Interest rates hit 3% in biggest hike since Black Wednesday

The Bank of England’s Monetary Policy Committee (MPC) has voted 7-2 to raise the Bank Rate from 2.25% to 3%.

The hike in rates is the biggest of its kind since Black Wednesday when rates were briefly hiked from 10% to 12% – or, excluding that, since 1989.

The Bank Rate of 3% comes as a result of eight successive interest rate rises, leaving rates at their highest level seen since Autumn 2008.

In principal, Threadneedle Street will be hoping a further tightening of credit will put the brakes on rampant inflation which sat at a 40-year high of 10.1% in September, some way off its target of 2%.

Yet, with the markets uncertain and the economy headed for recession, it is vital that the rate rise will not rock an already precariously balanced ship.

One group who will certainly feel the pain of the MPC’s decision is homeowners – especially those tied to a variable-rate mortgage.

It therefore comes as no surprise that Twenty7Tec’s October 2022 UK mortgage data revealed the month was the third-busiest ever seen for total mortgage searches as homeowners search for cheaper deals amidst the ongoing affordability squeeze.

Industry reaction to the Bank Rate rise

“It’s set to be a gloomy winter with eye watering mortgage costs for those coming to an end of two and five fixed rate deals alongside spiraling living costs,” said Paula Higgins, CEO of HomeOwners Alliance, adding that a striking two million people on variable deals will now have significantly raised outgoings. Higgins also reiterated the impact this has on first-time buyers:

“It’s a doubly difficult time for first-time buyers as they see their purchasing power diminish alongside a depleted number of 95% mortgages. The last time high loan-to-value mortgages disappeared during the pandemic the Government stepped in with the Mortgage Guarantee scheme. The government is due to review the need for the scheme ahead of its end date in December. We’re calling on the government to give clarity on this ASAP.

“Today’s decision will only add to the existing anxiety caused by the current cost of living crisis that has engulfed many households in recent months,” said CEO of RIFT Tax Refunds, Bradley Post, adding that “for the vast majority, the belt simply can’t get any tighter, whilst many more have no other choice but to utilise overdrafts and credit cards simply to get by from one month to the next.”

Alex Maddox, Capital Markets and Digital Director, Kensington Mortgages, said:

“This substantial rise, the highest jump since 1989, hopefully only means we are getting closer to the peak rate. With so many volatile macro events happening over the last few weeks, difficult decisions have been made by the MPC and today’s result will hit hard for households, homeowners and prospective buyers. The clouds of recession loom though on the horizon and the Bank of England needs to consider how tough on inflation it wants to be.”

Rightmove’s property expert Tim Bannister said:

“The era of historically low interest rates looks to be over, which is making it more challenging for those new first-time buyers who are stretching themselves financially to try and get out of the frenzied rental market and onto the housing ladder.

However, compared to the volatility of a few weeks ago, mortgage rates have now started to stabilise and fall. As today’s rise was expected, we don’t think we’ll see any significant changes to new fixed rate deals based solely on today’s interest rate rise.”

Cecilia Mourain, MD of Homebuying, Moneybox, said:

“The last six months have been tough for aspiring homeowners, and pressure on borrower affordability remains. The same salary and deposit amount enables first-time buyers to borrow considerably less than 12 months ago so many face hard choices. Borrowers must prove they can afford current interest rates, and further interest rates rises, which becomes progressively more challenging.

A likely knock-on effect is downward pressure on house prices – increased supply and lower demand. If buyers can borrow less they can offer less for a property Also, as existing homeowners come to the end of fixed rate deals, they may feel pressure to downsize in order to keep their mortgage payments manageable.”

CEO of Alliance Fund Iain Crawford said the hike will dampen the enthusiasm of those hoping to buy, “exiling them to the rental market for quite some time more”:

“The mere suggestion of a 3% base rate will be unheard of for many homeowners who have only known interest rates to sit below 1% until very recently.

So they can be forgiven for feeling a tad dizzy at the prospect of what their mortgage is now likely to cost them, with the Bank of England not only implementing the largest single increase in over 33 years, but also pushing the base rate to its highest since November 2008.”

Managing Director of Barrows and Forrester, James Forrester, said it’s time for homebuyers to “wake up and smell the coffee” as cheap mortgages are a thing of the past:

“The prolonged period of borrowing affordability that the nation’s homebuyers have basked in for some years is well and truly at an end. This latest, quite drastic hike, shows that the Bank of England have been asleep at the wheel for some time, awaking only now to the realisation that the economy is hurtling towards a sharp bend.

While we anticipate that the base rate will fall again come next year, we can expect market conditions to dampen over the coming months as buyers no longer have the purchasing power to pay the hefty property price premiums of the pandemic market boom, while sellers will remain stubborn in their expectations and refuse to adjust their asking price.”

CEO of Octane Capital, Jonathan Samuels, commented:

“While the mortgage market has settled in recent weeks, today’s latest base rate hike will certainly sow more seeds of panic amongst the nation’s homebuyers and who can blame them after witnessing the largest single increase since 1989.

The average homebuyer opting for a variable rate mortgage can expect to see the cost of their monthly repayment increase by around £166 per month as a result of today’s increase.

Those currently coming to the end of a three year fixed mortgage will also see an increase as they look to secure another fixed term, with their monthly repayment increasing by an estimated £257 per month, despite having cleared a substantial chunk from their original loan.”

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