Thousands of London families were dealt a new cost of living blow on Thursday when the Bank of England ordered a 0.5 per cent rise in interest rates to a 14 year high of 3.5 per cent.
The half point hike is the ninth in succession from the Bank’s Monetary Policy Committee (MPC) since it first began raising the cost of borrowing to curb rampant inflation almost exactly a year ago.
The rate setting MPC, chaired by the Bank’s Governor Andrew Bailey, voted 6 to 3 for the increase, which was in line with City expectations.
It is lower than the MPC’s 0.75 per cent rise last month and follows a similar 0.5 per cent increase in rates from the US Federal Reserve on Wednesday night.
Chancellor Jeremy Hunt said: “High inflation, exacerbated by Putin’s war in Ukraine, continues to plague countries across the world, eating into people’s pay cheques and driving up food and energy prices.
“I know this is tough for people right now, but it is vital that we stick to our plan, working in lockstep with the Bank of England as they take action to return inflation to target.
“The sooner we grip inflation the better. Any action which risks permanently embedding high prices into our economy will only prolong the pain for everyone, stunting any prospect of economic recovery.”
Colin Dyer, financial planning expert at fund manager, Abrdn said: “With undeniable financial pressure on cash-strapped households right now, another hike to interest rates will come as a further blow for borrowers battling to stand on two feet.
“The Autumn Statement did almost nothing to squash money worries for most, especially with tax freezes leaving some facing the prospect of higher tax bills for many years to come. On top of this, eye-watering inflation isn’t going to ease anytime soon, so those that are able to save must do what they can to protect their future finances.
“As we approach the costliest time of the year, many will be looking to make cutbacks. On top of this, those able to save or invest should seek to use all the tax reliefs and allowances available. Remember too that professional help is out there, whether you need support with bills and debt, or help with planning for your future finances.”
Only those borrowers with tracker or variable mortgages that move in line with the Bank’s benchmark interest rate will be initially affected.
There are thought to be around 200,000 mortgages of this type outstanding in the capital - about 20 per cent of the total.
It will increase the monthly repayment bill for a typical £250,000 London tracker mortgage with 20 years to run by £65.87 from £1482.22 to £1548.09, an annual rise in household costs of £790.
For a larger £300,000 loan the increase is £79.04 from £1778.66 to £1857.70 while those who have taken out £500,000 mortgage the hike is £132.26 from £2964.44 to £3096.17.
The vast majority of borrowers are protected by two or five year fixed rates but the Bank said earlier this week that around four million mortgage holders will be exposed to higher rates over the next year when cheap fixed deals expire.
On Thursday, the average two year fixed rate stood at 5.83 per cent while the average five year rate is 5.63 per cent, according to latest data from analysts Moneyfacts.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Borrowers who are worried about paying their mortgage should get in touch with their lender. It may be possible to extend the term of the mortgage, change to interest-only or part interest-only/ part repayment.
“There are implications in making these adjustments but borrowers could do this on a short-term basis and when the opportunity arises, move back to full repayment, making overpayments to get back on course.”
Marcus Dixon, director of UK residential research at agents JLL said: “We expect bank rates to top out at around 4.5 per cent, lower than some were forecasting a few months ago.
“This aligns with the assumptions in our house price forecasts, with prices expected to fall 6 per cent in 2023 across the UK before beginning to recover in 2024.”
Meanwhile figures from Freedom Finance’s Consumer Credit Monitor on Thursday showed how the cost of consumer credit is also rising.
It found that the average quoted rates on a £5000 personal loans rose by almost two thirds of a percetage point to 10.02 per cent at the end of November, breaching double digits for the first time since December 2013.
Credit card rates grew by a fifth of percentage points to 22.03 per cent – their highest average rate since 1998.
Emma Steeley, CEO of Freedom Finance, said “As we head into a winter dominated by fears over energy bills, blackouts and surging inflation, the latest figures on the cost of borrowing will only add to the headaches many households are nursing.
“Just because the cost of borrowing is rising doesn’t mean consumers should be paying above-average rates on their credit products. Following simple best practice actions can help people secure a product that suits their circumstances, supports their financial situation and is delivered at the best rate available to them.”
