Mortgage borrowers face further increases in the cost of both fixed and variable-rate deals, brokers and finance experts warned.
The BoE’s decision to raise its base rate to 5 per cent — following higher than expected inflation data on Wednesday — came as a blow to mortgage borrowers already contemplating soaring bills.
Fixed-rate mortgages are protected from immediate changes in base rates for the term of the fix. Borrowers on variable or tracker deals, which are linked to a lender’s standard variable rate (SVR) or base rates, typically respond more directly to BoE rates announcements.
But the wider uncertainty in the market provides banks and building societies with little comfort over their pricing of loans. David Hollingworth, associate director at L&C, said: “I don’t think we’re out of the woods in terms of the movement in fixed rates at the moment.”
Wednesday’s inflation figure will maintain the upward pressure on rates, Hollingworth added. “Lenders are trying to work out where the level of the market lies. That leads to fixed rates becoming more expensive in the near term at least.”
Lenders began announcing changes to their variable rates after the decision on Thursday. Santander said its tracker rates for existing customers would increase by half a percentage point from the beginning of August. It will hold its SVR at 7.5 per cent.
For those who receive the full force of the rate rise, costs will rise substantially. Gary Smith, partner at wealth manager Evelyn Partners, said borrowers should expect greater turbulence in the mortgage market after the rate rise.
“Lenders were probably already pricing in a 25 basis point move, but the repricing of home loans looks like it will now be more dramatic and protracted.”
Others insisted banks had already moved so far on fixed rates that further big moves were unlikely.
“I think most of the changes on fixed rates have already occurred,” said Mark Harris, broker at SPF Private Clients, though he added that smaller lenders were more vulnerable to market movements and therefore more likely to pull deals from the market at short notice.
The impact of higher rates on house purchase activity was not yet apparent, estate agents said. Matt Thompson, head of sales at estate agent Chestertons, said: “At this stage, we haven’t yet encountered homeowners who have been forced to sell up but, if rates continue to rise, some owners may be forced to review the situation and weigh up their options.”
However, he added that heavily mortgaged buy-to-let landlords, who typically hold interest-only loans, could face higher payments that would threaten their ability to make a profit. “This could result in some landlords deciding to offload their assets.”
While fixed rates offer borrowers a measure of protection, base rate rises can affect those applying to refinance their fixes, via the affordability tests lenders apply to gauge a borrower’s ability to repay.
Base rates are an important factor in these tests, which judge whether repayments could be sustained under “stressed” conditions at higher rates.
Adrian Anderson, director at broker Anderson Harris, said the stress rate — about 8 per cent before the rate rise — was often based on a lender’s standard variable rate, which would typically move in step with the BoE official rate.
“Most people are maxing out on affordability now,” he said. “We’re spending a lot more time checking affordability with the different lenders.”