Sunday, June 26, 2022

The Bank of England is raising interest rates to 1.25% – what this means for you

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The surge is expected to help curb inflation, which is skyrocketing in large part due to the huge rise in wholesale energy prices, causing household utility bills and pump prices to skyrocket

The surge is expected to help curb inflation, which is skyrocketing in large part due to the huge rise in wholesale energy prices, causing household utility bills and pump prices to skyrocket.

The Bank of England (BoE) has hiked interest rates to 1.25 percent, opting for a smaller hike than its US counterpart.

Since December 2021, the UK central bank has hiked interest rates four times, meaning the policy rate has risen from 0.1 percent to 1.25 percent.

In the UK, the consumer price index rose 7.8 percent in the 12 months to April, compared with 6.2 percent in March, adding to pressure on household finances.

The US Federal Reserve hiked interest rates by 75 basis points on Wednesday – the largest single hike since 1994 – in a bid to cool inflation from a 40-year high.

While the BoE’s move is aimed at dampening inflation, it will add pressure to already-stretched households as tracker mortgage rates rise and fixed-rate mortgage rates creep up for new applicants and those seeking debt restructuring .

However, rate hikes are potentially good news for savers as long as financial firms pass on the rate hikes in their savings products, while their potential indirect impact on food prices is mixed.

I takes a look at how the changes could affect you and your finances.

How interest rate increases affect mortgages

According to UK Finance, 1.3 million fixed rate mortgage deals will eventually come to an end this year, forcing borrowers to refinance at a higher rate. There are also almost 1.9 million people on an adjustable-rate or tracker mortgage, which automatically moves according to interest rates.

That means those with deals that are dying, or new potential buyers, have rushed to get a new mortgage or get a mortgage ahead of today’s rate hike in order to get a better deal.

Those who were unable could see their bills skyrocket by hundreds a month.

Average yields on 2-year fixed rates from the top 10 lenders – before today’s rate hike – had tripled since bottoming out in October last year, a study by L&C Mortgages shows this month.

The average lowest 2- and 5-year fixed rates both rose to over 2.7 percent this month.

“That’s a sharp increase from historic lows last October, when average 2-year and 5-year fixed rates were just 0.89 percent and 1.05 percent, respectively,” the company said.

“A borrower taking out a mortgage with a typical repayment of £150,000 over 25 years would expect monthly payments to be £125-130 higher than at the bottom, totaling £1,500 more in payments per year than at the bottom of the last year.”

Data provider Defaqto added that mortgages have seen a sudden surge in the past two months as lenders started to factor in current and expected future rate hikes.

“As of April this year, the best interest rate for a 2-year fixed-rate mortgage with a 75 percent loan-to-value ratio (LTV) was just 1.95 percent,” the company said.

“In two months, this has increased to 2.49 percent. This hike is higher than the underlying BoE rate hike (0.75% to 1% ahead of today) as lenders prepare for further hikes.”

And it’s getting even harder to find solid deals.

Defaqto said the number of fixed rate mortgages available had shrunk to 1,953 – similar to the last time in March 2021 – and a “significant drop” from what was available just two months ago (2,086 mortgages).

If interest rates had risen to 1.5 per cent, the average fixed rate borrower would have to pay around an extra £190 a month to service their mortgage, UK Finance has calculated.

While rate hikes don’t affect tenants directly, they can do so indirectly if landlords have to refinance their debt at higher rates and want to pass those costs on to tenants.

savings and investments

Rising interest rates can be positive for savers, and interest rates on savings accounts should rise at least marginally, although they will still be low by historical standards.

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