Mini-Budget: Kwasi Kwarteng says UK at ‘beginning of new era’
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Mortgage rates could hit 8% or 9% early next year as policymakers battle to curb inflation and end the sterling crisis, experts warn. This will add thousands of pounds a year to borrowers’ costs in a body blow for millions.
More than 2.2 million homeowners with variable rate mortgages have seen their monthly payments steadily increase this year.
The BoE has hiked interest rates for seven meetings in a row, from 0.1 percent to today’s 2.25 percent. Banks and building societies have been quick to pass on higher borrowing costs.
Homeowners who have locked into a fixed-rate mortgage have been spared so far, but face a massive payment shock when their deal expires.
Yesterday, Bank governor Andrew Bailey said he would hike rates further to bring inflation down. His own organisation predicts inflation will hit 11 percent in October and now it could go even higher.
The fallout from Chancellor Kwasi Kwarteng’s mini-Budget on Friday will force the BoE’s monetary policy committee to hike interest rates at an even faster rate, said Laura Suter, head of personal finance at AJ Bell.
Homeowners will pay the price.
Before Friday’s controversial mini-Budget, markets were betting that interest rates would peak at around 4.75 percent by the Spring. “Now they’re forecasting six percent,” Suter said.
That could drive mortgage rates to levels not seen in many years. “We’ve already seen mortgage rates shoot up from their record lows and they’re expected to rise further,” she added.
Banks and building societies may jump the gun and increase rates ahead of the next base rate rise, in anticipation of aggressive action, she said.
Yesterday, banks started pulling some of their best deals, amid chaos and uncertainty.
Borrowers who have locked into a fixed rate mortgage can breathe a sigh of relief as they will be protected from rate rises – for now.
The problem is that the most popular type of fixed rate lasts for just two years, and many will expire at the worst possible time.
Those whose deals are up in the next 12 months may find their mortgage costs rise dramatically when they apply for a new deal, Suter said.
She calculates that somebody who took out a two-year fixed-rate for £200,000 in March 2021 could pay a staggering £7,000 a year MORE when that deal expires in April 2023.
That would add £583 to their monthly repayment, in a matter of monehs.
This will put added pressure on homeowners at a time of rampant inflation, said Myron Jobson, senior personal finance analyst at Interactive Investor.
“Those on variable rate mortgages will automatically feel the brunt, while those approaching the end of their fixed term deals will be in for a serious shock when they seek to refinance.”
Do not hang around but take action, Jobson advised. “Anyone looking to buy or remortgage in the near future should consider securing a deal now. Mortgage deals are often valid for a number of months, so it may not be too early to start looking.”
Before switching, homeowners should check the terms of their existing deal to see if they will have to pay early redemption charges if they switch now. Exit penalties may wipe out the benefits of moving, so check the small print first.
Jobson said the big question is whether rising borrowing costs will finally take the steam out of the UK’s “sizzling” property market. “The ongoing demand-supply mismatch could may continue to prop up house prices.”
Yet rising mortgage rates will inevitably make buyers think twice, hitting sales despite Friday’s stamp duty cut, said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
A house price crash is not inevitable, though. “It will only happen if the economy tips into recession and companies start laying off workers, so they cannot afford to service their home loans.”
Falling house prices may do little to help first-time buyers as higher borrowing costs will offset the benefits, Coles added.
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