Mortgages to Soar in Biggest Interest Rate Rise in THREE Decades – ‘Homeowners Hammered’ | Personal finance | Finance
Mortgage experts are warning borrowers to choose their next transaction carefully, to protect themselves as much as possible against rising interest rates. Homeowners who subscribe to a two-year fixed rate may find that it expires at the worst possible time, as mortgage rates will soon hit 5%.
The Bank of England is set to raise interest rates for the seventh time tomorrow, increasing pressure on millions of borrowers.
Rates on mortgages, credit cards, personal loans and overdrafts have already risen sharply this year as lenders pass higher base rates on to customers.
The discount rate is currently at 1.75% but could rise to 2.50%, depending on what the BoE’s monetary policy committee decides.
Markets still believe a 0.75% rise is the most likely scenario tomorrow, which would be the biggest rise since 1989.
Further hikes could follow in November and December, with traders betting that the Bank Rate will hit 3.75% by the end of the year as the BoE struggles to rein in inflation.
The average two-year fixed rate mortgage now costs 4.09%. It is the first time that it has exceeded 4% in nine years, according to Moneyfacts.
New mortgage rates are rising at an even faster rate than interest rates, so homeowners should prepare for another big jump after the BoE’s decision tomorrow.
This is a big worry, as one in four borrowers say they won’t be able to pay their mortgage if interest rates hit 5%.
Borrowers on variable-rate mortgages, or whose fixed-rate agreements expire in the next 12 to 18 months, are most affected, according to research by moving company Anthony Ward Thomas.
Founder Anthony Ward Thomas said: “Add in higher energy, fuel and food bills and it’s no wonder people are uncomfortable.”
Worried homeowners should consider fixing their mortgage for more than two years, as this means it could expire when borrowing rates are even higher.
Chris Sykes, CTO at brokerage Private Finance, said two-year fixed rates are generally cheaper than five-year fixed rates, but that’s not currently the case. “Today’s best two-year buy is only 0.07% more than the best five-year fix available, amid money market volatility.”
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Barclays is currently offering a best buy five-year fixed rate mortgage at a competitive price of 3.49%. However, this is only available for loans up to 60% loan-to-value ratio (LTV) and carries a product fee of £999.
The rate goes up to 4.20% for buyers who only have a 5% down payment and need to borrow up to 95% of the LTV. There are no product fees, however.
Personal loan rates are also rising, with the average APR on a £7,500 five-year loan now at 5.7%, the highest since January 2016, Moneyfacts said.
A year ago, it was 4.4%.
Credit card rates are also increasing, even though they already charge significantly more than base rates.
A year ago, with a bank rate of 0.1%, the average card APR charged 26%. Since then, it has climbed to 29.6%.
The number of cards charging zero interest on balance transfers and new purchases for an introductory period has also declined as credit card issuers tighten up.
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Moneyfacts financial expert Rachel Springall said rising rates threatened to deepen the cost of living crisis. “Consumers should track their refunds and switch to cheaper offers if they can.”
She urged borrowers to check their credit score before applying for mortgages, loans or credit cards, and to seek advice if they are struggling with debt.
Michael Hewson, chief market analyst at CMC Markets, said many analysts still expect a 0.75% rise tomorrow, but many borrowers could struggle even if the BoE only increases by 0.75%. 0.5%.
“While the interest rate hikes are designed to tackle inflation and the cost of living, they will leave borrowers, especially those without fixed terms, worse off.”
Walid Koudmani, chief market analyst at financial broker XTB, said the Bank of England faced a tough task as the pound fell to a 37-year low against the US dollar of just $1.135.
“He has to strike a balance between managing inflation, supporting the currency without negatively affecting the overall economy.”