Base RateMar 18 2022

Brokers dub BoE rate rise 'naive’ as mortgage payments climb

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Brokers dub BoE rate rise 'naive’ as mortgage payments climb
Photographer: Jason Alden/Bloomberg

Today (March 18), a handful of lenders withdrew certain variable rate mortgages and increased variable rate trackers by 0.25 per cent, following a 0.25 percentage point base rate rise to 0.75 per cent yesterday (March 17).

Yorkshire Building Society has gone as far as to withdraw all its variable rate tracker mortgages “with immediate effect”, according to Moneyfacts.

Meanwhile lenders such as HSBC and First Direct have increased their variable tracker rates in line with the base rate rise.

Trying to dampen domestic demand, and therefore inflation, by increasing interest rates seems naive at best.Scott Gallacher

Many lenders had already hiked their interest rates ahead of the central bank announcement. “Lenders have been making changes for quite some time, especially since the Bank of England signalled rates would come up,” Aaron Strutt, director at Trinity Financial, told FTAdviser.

He added that more base rate changes seem to be on the way, due to the fact many fixed-rate mortgages are now cheaper than their swap rate equivalents.

“It’s heading towards 2 per cent being the benchmark for mortgage rates, though we’re not there just yet,” said Strutt.

In November, prior to the central bank’s first base rate rise since the pandemic, the mortgage market was seeing interest rates fall to historic lows meaning mortgage arrears fell to their lowest level since 2007.

Scott Gallacher, a chartered financial planner at Leicestershire-based Rowley Turton, said increasing interest rates to control inflation is “the wrong policy at the wrong time”. 

The monetary policy committee said yesterday it expects inflation to increase to about 8 per cent in the second quarter of the year, with the possibility of a higher rise at some point in 2022.

We have a very tough year ahead and raising rates now is not the answer.Dominik Lipnicki

“Current UK inflation is primarily being driven by external international factors such as rising gas and oil prices and Chinese supply issues due to Covid-19, so trying to dampen domestic demand, and therefore inflation, by increasing interest rates seems naive at best,” said Gallacher.

“The cost of living crisis will more than dampen UK consumer demand. And UK consumers don't need a double whammy of rising mortgage payments and rising bills."

Rate rise 'adds £316.56' to annual mortgage payments

Dominik Lipnicki, director of Your Mortgage Decisions agreed the Bank of England raising the base rate “will do very little to fix the problem [of inflation]”. 

With an energy price cap rise of 54 per cent - with further rises still to come - coupled with the upcoming National Insurance hike of 1.25 percentage points set to raise an extra £13bn, many people “will struggle and have to choose between heating and eating”, he said.

By increasing their mortgage payments, Lipnicki said this financial strain will only become “more severe”. 

Increasing people's mortgage payments isn't going to bring down the price of petrol.Scott Taylor-Barr

“We have a very tough year ahead and raising rates now is not the answer,” he concluded.

According to online mortgage broker Trussle, the latest base rate increase could add a further £316.56 onto the average mortgage annually.

This is on top of the previous increases in January and December which it said added £650.04 to homeowners’ annual repayments. As a result, Trussle said homeowners’ may see their mortgage increase by £972.60 each year.

Scott Taylor-Barr, a Shropshire-based broker at Carl Summers Financial Services, said the issue is that the biggest price increases are on essentials, not things consumers choose to buy.

“So is adding to what is widely touted as the biggest decrease in our standard of living for decades by increasing interest rates really that helpful?”

Inflation is not rising because “we're all feeling flush and spending our money on luxuries”, said Taylor-Barr. It's rising, he went on, because the essentials of modern life are all “skyrocketing”. 

“Increasing people's mortgage payments isn't going to bring down the price of petrol.”

‘We need to wean off ultra-low interest rates’

Some brokers, however, were not so quick to criticise the Bank of England’s decision to keep raising the base rate. 

Graham Cox, founder of the Bristol-based Self-Employed Mortgage Hub, said: “As much as it adds to the existing pain, I do think we need to wean the economy off its dependence on ultra-low interest rates.”

Last year, Nationwide became the first lender in British history to offer a sub-1 per cent rate on a five-year fixed rate mortgage. A few months later, the lender also launched the UK’s first ever sub-1 per cent buy-to-let mortgage, meaning landlords as well as retail borrowers could benefit from some of the lowest interest rates ever recorded.

But now, with three successive base rate rises in four months, these historically low rates are back on the rise.

We do expect the upward trajectory of mortgage rates to endure for the foreseeable future.Simon Gammon

“Inflation is running riot and could remain high for a couple of years. It will cause huge damage to the economy if we're not careful,” said Cox.

“I think we need to continue slowly raising the base rate and take the medicine now. Or we will be storing up far greater problems for later on."

Simon Gammon, managing partner at Knight Frank Finance, said often the repricing his team is seeing is by as little as 0.1 or 0.2 per cent.

“But if that’s happening every other week then you start to see a steady upward trend,” he explained.

"Five-year fixed rates were as low as 0.91 per cent late last year, but now you’d be lucky to get them under 2 per cent. Borrowers haven’t missed the boat, these rates are still very low by historic standards. But we do expect the upward trajectory of mortgage rates to endure for the foreseeable future."

ruby.hinchliffe@ft.com