Stalling inflation triggers 0.5% rate hike forecast to pile on mortgage pain

Stubborn inflation numbers revealed today raise the likelihood of the Bank of England raising its base rate by 0.5 percent tomorrow, further hurting mortgage borrowers.

Inflation in the UK stalled at 8.7 percent, the ONS revealed, raising hopes of a cut. Core inflation – the key underlying figure that smooths out volatile food and energy costs – rose again to 7.1 percent, the highest level since 1992.

The Bank of England expected core interest rates to fall to 6.8 percent this month.

The inflation numbers added more misery to a mortgage market where the two-year average fixed rate had already continued to rise, from 6.07 percent yesterday to 6.15 percent today, according to data provider Moneyfacts.

At the start of the week, most expected the Bank of England’s rate-setting Monetary Policy Committee to raise key interest rates by 0.25 percentage point to 4.75 percent. Now the markets are pricing in a move to 5 percent, driving up the cost of borrowing even further.

This is likely to affect mortgage rates as lenders react to increased borrowing costs and fear that base rates will now peak at around 6 percent. This is more than 1 percent higher than the expected peak at the last meeting of the MPC in May.

For more than 1.5 million homeowners due to re-mortgage this year — many of whom will have fixed interest rates below 2 percent — the increases will add further strain to already strained household finances.

A borrower with a £200,000 mortgage with a fixed interest rate of two years over 25 years will now have to pay around £420 more per month than in 2021.

> Why are mortgage rates rising so fast – and how high will they go?

In response to heightened expectations for base rates, both government bond yields (the interest rate on government borrowings in the UK) and swap rates – the money market rates that lenders use to price fixed-rate mortgages – have risen significantly.

Five-year swaps are currently around 4.79 percent. On May 22, they were around 4.17 percent. Similarly, the two-year swap rate is now 5.47 percent, compared to 4.63 percent in May.

Nicholas Mendes, mortgage technical manager at John Charcoal says: “Ultimately, this is not good news for mortgage holders who are currently on a floating rate or are approaching their final year of their fixed rate deal likely to fall below 2 percent.”

The average two-year fixed mortgage rate is now 6.15 percent, according to Moneyfacts, up from 6.07 percent yesterday.

The five-year average with a fixed rate is now 5.79 percent, compared to 5.72 percent.

Justin Moy, founder of mortgage broker EHF Mortgages, said: “This is a disaster for inflation and the government this morning, pretty much guaranteeing a 0.5 percent hike in base rates this week.

“The Bank of England has no other tools or resources to try to reduce inflation, and lenders have already priced their products for this.

“The fear of god has already been put into borrowers this month, and there are already plenty of panicked borrowers in my inbox this morning screaming for help.”

> How will rising rates affect you? Use our True Cost Mortgage Calculator

The total CPI in May was 8.7 percent, the same as in April

Several major lenders, including TSB, HSBC and Natwest, have repeatedly raised their mortgage prices in recent weeks in anticipation of higher interest rates.

As a result, some brokers believe lenders have already priced in a 0.5 percent increase in base rates, preventing a wave of change this week.

Mendes said: “I expect markets to now price in a base rate spike of 6% to 6.25%, a substantial difference from a few months ago when it was 4.75%.

“Today is going to be interesting, but I don’t expect a slew of lenders to take money right away. Lenders await market reaction to the governors’ comments tomorrow, but next week I expect the same movement of lenders and repricing.”

Swap rates – the main pricing mechanism for fixed-rate mortgages – are back almost at the same level as after the mini budget.

Rohit Kohli, director of The Mortgage Stop, agrees, adding: “It is to be hoped that lenders have already factored in this potential rate hike as there have been significant rate hikes over the past month. This could stabilize swap rates and prevent frequent changes in lenders’ products.”

However, he warns that inflation data could unsettle markets and cause swap rates to rise. We could see more increases and a hit in house prices.

Economic consultancy Capital Economics predicts that if mortgage rates reached 6 percent for the first time since 2007 and stayed there for several years, a 25 percent fall in home prices would be likely.

Andrew Wishart, senior real estate economist at Capital Economics, said: ‘While the aggregate increase in mortgage interest costs will still be smaller than in 1988-1990 and 2002-2007, it will be carried by a smaller group.

“The hardest hit households will see a 50 percent increase in their monthly mortgage payments, similar to the increases seen in the late 1980s.”