By Sarah Macklin 
It’s another blow for homeowners as the Bank of England announced this morning that it’s raising interest rates to 5.25%, up another quarter percent. Although official data from the Office for National Statistics (ONS) revealed that inflation dropped to 7.9% in the year up to June in a bigger than expected fall – its lowest level in over a year – it still remains four times higher than the Bank of England’s 2% target.
We recently discussed the worry that homeowners have, with a third estimating they might struggle to make repayments.
The increases are upping people’s mortgages by hundreds of pounds, and those coming out of their fixed terms are being hit the hardest. While you may think switching to a variable interest rate is the answer, these rates tend to be much higher, as much as 8 or 9%, so fixing in at a higher rate for a couple of years is the only option.
What impact will the increase have?
The interest rate rise means more people will see their mortgage monthly payments increase. David Hannah, Chairman of Cornerstone Group International says: “Due to today’s decision from the Bank of England to raise interest rates to 5.25%, homeowners coming off fixed-rate deals and moving straight into a 6% mortgage are going to be unable to afford them, leading to an abundance of repossessions and forced sales which is not good news. Fundamentally it’s going to shatter confidence in the market.
“The current environment will lead to a slowdown in property sales, which Nationwide already revealed earlier this week, as well as a potential decline in property prices, impacting both existing homeowners and those aspiring to join the property ladder.
“Today’s announcement is also set to affect first-time buyers who may now be unable to make a first step onto the housing ladder due to unaffordable mortgage rates. The rise will also have a knock-on effect on the rental market too – it has already been suffering from a lack of supply, and now, with a growing number of would-be buyers in need of a place to live, this is going to be exacerbated further. The result of this is that rental prices and competition will likely increase at a time when people are already struggling.”
Who will be affected by the increase?
Households are set to be put under further pressure as the rise is set to affect more than 1.4 million people on tracker and variable mortgage deals, who will see an immediate increase in their monthly payments. The rise will be even stronger for the 1.5 million households with fixed mortgage deals set to expire this year.
It’s not just affecting existing homeowners – around half of first-time buyers need to search for homes that are 20% cheaper so they can afford the monthly repayments, Uswitch outlines. Over a quarter (27%) of first-time buyers are taking on mortgages of over 36 years. Spreading the cost over a longer period does mean you can buy a more expensive home, but you may also be stung on interest, paying much more for a longer term mortgage.
For those younger buyers that may have previously relied on family to help them out, this may not be an option if their families are also struggling with their home finances.
What can be done about the increase?
David Hannah explains: “I think what should be considered is having a maximum cap on mortgage payments for homeowners, with the remaining amount of increased interest being added on to the balance of the mortgage. By doing this, more homeowners will be able to afford their monthly payments and it will mean more people and families can keep their homes. Everybody’s just about managing at the moment and if you look at the underlying factors that created this inflationary cycle, they’re not in the control of consumers.”
Senior Capital, a leading innovator in later-life lending products, argues that the interest rise will elevate this critical issue, highlighting that a majority of those over the age of 50 are being forced to reconsider their financial situation due to soaring costs. A recent PPI study reported that the number of workers dipping into their retirement savings this year increased by almost 20%.
Despite over 62% of homeowners being over the age of 65, a majority are still struggling to access capital amidst inflationary pressures, with a large amount of wealth currently tied up in property. Almost 2 out of 3 over-65 households have £125,000 or more in property wealth, with an additional 1 out of 3 with £250,000 or more stuck in the value of their property, according to the Equity Release Council.
Subsequently, equity release has become an increasingly attractive option for the older generation to access a ‘frozen’ pile of cash and distribute this down the generational line to support the younger generation with reaching homeownership.
Rudy Kahitan, Managing Partner of Senior Capital, explains: “Today’s rate rise will deal yet another significant blow to mortgage holders, with millions already reporting up to a 60% increase in their monthly repayments.”
One option for families who are struggling is equity release. Kahitan says: “The right equity release mortgage product, particularly those that offer the greatest flexibility through limited prepayment penalties, can be the better option vs a more traditional mortgage when you want to unlock the value in your home without taking on additional monthly repayments. It allows homeowners to access the equity built up in their property, providing a tax-free lump sum to supplement regular income, whilst still retaining ownership and the right to live in their home for life or until they move into long-term care.”
Jeremy Davidson