Winter Is Here – Stark Future For Mortgage Borrowers As We Face Longest Recession Ever

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The UK faces stark news as the Bank of England warns of the longest recession since records began, raising interest rates to 3% in the most significant rate hike in 33 years.

The Bank of England says that the UK might face a two-year slump with unemployment nearly doubling by 2025.

To ease the pressure on prices caused by the cost of living crisis, the Bank of England has raised its interest rates. The Bank of England believes that increasing the interest rates and making borrowing more expensive will encourage people not to spend.

It’s hard to tell how far interest rates will go over the next few months, with some warning of an increase of at least 6.5% by the start of next year.

This is terrible news for loan and mortgage holders; as of Thursday, 3rd November 2022, the average 30-year fixed-mortgage rate is up 3% since last week at 7.23%.

The previous base rate increases over the last two years have seen the base rate rise in either 0.25% or 0.5% jumps. The interest rate has risen from 0.1% to 3% in under two years.

This has pushed the typical cost of mortgages up over the past 11 months by successive base rate increases. The cost of fixed-rate mortgages has risen substantially over the past year, driven higher by the poorly received mini-Budget and the Bank of England’s rising rates.

The debt-funded tax cuts, which the government reversed, have triggered financial turmoil, and government borrowing costs have spiked. Government borrowing costs had since fallen back to levels seen before Liz Truss resigned, but fixed mortgage rates have remained high.

The rise means the cost of variable deals and new fixed-rate deals have also hiked rapidly. Some mortgage borrowers’ monthly payments may increase by hundreds of pounds.

In reply to the Bank of England’s rise in interest rates, Jeremy Hunt has acknowledged the hardships facing homeowners and businesses but has pledged to get the economy under control by providing lower mortgage rates, long-term growth and job stability.

For now, Mr Hunt is considering slashing the dividend allowance and raising the Capital Gains Tax to fill the £50 billion pit of despair in the UK’s finances.

The average two-year fixed rate mortgage has almost doubled compared to last year, now 6.47%, with a five-year set at 6.32%. Repayments on the typical mortgage have increased by hundreds of pounds since the base rise began.

During covid times, interest rates reached record lows, with some deals being priced below 1%, but now the cheapest fixed mortgage deals are charging more than 5%. The average mortgage borrower coming off a two-year fixed mortgage will see their rate rise from 2.43% in November 2020 to 6.47%.

On a £200,000 mortgage being repaid over 25 years, a typical mortgage borrower will see their monthly repayments rise by £457, from £890 to £1,347. This would make £5,484 more in mortgage costs each year, which may continue to increase in the coming months.

According to Martin Lewis (Financial Journalist), mortgage holders will see the yearly costs increase by more than £400. While the Money Saving Experts say tracker deals will rise by roughly £40 per month for every £100,000 worth of mortgage.

What Does This Mean For Mortgage Borrowers?

Mortgage costs will continue to rise as long as the Bank of England raises interest rates, which means that the number of money people can afford to put in for houses lessens. If the interest rates stay sky high, the increasing number of people who come off fixed-price mortgages will go onto new, much higher rates.

This will lead to more homeowners being unable to afford monthly mortgage payments, making them much more likely to sell. Mortgage affordability is a cycle that depends on other factors like energy bills, wages and job security, so when one of these factors is struggling, the other factors will also work.

We spoke to Jonny Christie, Co-CEO of The Property Buying Company, about his thoughts on the increase in mortgage rates and what the average mortgage borrower can expect to see over the coming months.

Jonny said, “A rise in interest rates has been on the cards due to soaring inflation; however, I think the 0.75% rise taking the base rate to 3% is lower than what it could have been if Rishi Sunak had not taken charge.”

“The way the markets reacted to the mini budget in September and had Liz Truss’s and her Chancellor’s economic policy continued, interest rates may have risen further as the Bank of England would have had to take more drastic measures to help quell inflation and satisfy the markets.”

“I believe we will see a further rate rise in the new year towards 4%, and I think that the public has now had a chance to digest and factor in higher interest rates as part of life after a period of meagre rates.”

“The fear of interest rates reaching 6% plus has subsided somewhat which the implementation of Sunak as Prime Minister and the reversal of the tax cut that the mini budget brought in, so it will be a tough time for borrowers who are looking to obtain a mortgage or who are stuck on an SVR mortgage but the outlook is not as bleak as it was before the leadership change.”

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Tom is a Digital Content Writer passionate about sustainable property & property trends. Regardless of the subject, he will always write blogs of the best calibre. Read more about Tom here.

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About Tom Condon 126 Articles
Tom is a Digital Content Writer passionate about sustainable property & property trends. Regardless of the subject, he will always write blogs of the best calibre. Read more about Tom here.

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