The Bank of England’s base rate rise will cost UK households an extra £1.67bn in interest payments, and is likely to cause more mortgage prisoners, experts have said.
The central bank raised the base rate of interest by 0.5 percentage points to 1.75 per cent today (August 4).
UK households are currently paying £24bn in interest rate payments on floating debt, which will rise to £25.7bn immediately.
These debts include floating-rate mortgages, credit card debt, overdrafts and other unsecured personal lending.
The majority of this will be driven by floating rate mortgages, of which UK borrowers have £249.9bn secured against their homes, at an average interest rate of 3.21 per cent.
Director at Mazars, Ed Thomas, said the rate rise will add a “significant jump” in people’s mortgages and other debt costs.
“It’s likely that we’re going to start to see more personal insolvencies in the coming weeks and months as people simply become unable to service their debts alongside all those other costs.”
This will create more mortgage prisoners, said Simon Webb, managing director of capital markets and finance at LiveMore Capital.
“Despite the cancellation of stress testing, many people will be forced to pay a lender’s SVR because they can no longer meet the affordability tests to move to a different lender,” he said.
“Older borrowers could well be hit particularly hard,” he said, adding the demand for interest-only mortgages is expected to increase in order to help make mortgage payments more affordable.
The central bank’s monetary policy committee warned that inflation is likely to hit 13 per cent in the fourth quarter of the year.
Laith Khalaf, head of investment analysis at AJ Bell, said the next few months may well prove to be the "calm before the storm".
"Summertime means we’re not paying as much to heat our homes, and the popularity of fixed mortgage rates in recent years means homeowners will only feel the pinch of bigger interest payments when they roll off their current deals.”
However, he said, higher interest rates are a pretty vicious cure for inflation because they pile even more pressure on households across the country who are already beginning to struggle financially.
He hinted that the rate rise was unavoidable.
“They are the biggest weapon in the Bank of England’s armoury, and if the bank hadn’t followed through with a 0.5 per cent interest rate rise in the face of inflation rising to an expected 13 per cent, its credibility would have been shattered, leaving the governor with egg on his face.”
Senior pensions and retirement analyst at Hargreaves Lansdown, Helen Morrissey, agreed, saying we need to “brace for tough times ahead”.
“The Bank of England [has predicted] a recession on the horizon at a time when people are already under severe financial pressure from soaring bills,” she said.