More ‘mortgage misery’ looms with interest rates set to rise again

The squeeze on mortgage holders is set to tighten as the Bank of England gets ready to hike interest rates for the 13th time in a row, experts have said.

Some analysts are expecting interest rates to rise by another 0.25 percentage points on Thursday, and say there could be more hikes on the horizon.

It would take the rate to 4.75%, helping to drive the cost of borrowing and hitting more than a million mortgage holders whose fixed-rate deals are due to expire soon.

And a 0.5 percentage point increase is “not out of the question”, economists at Oxford Economics said.

It comes as the UK Government is under pressure to fulfil its pledge to halve inflation by the end of the year, to 5.4%. Consumer Prices Index (CPI) inflation eased back far less than expected in April, hitting 8.7%.

But the Bank of England is “caught between a rock and a hard place, as it has to choose between pushing more mortgage borrowers towards the brink and letting inflation run riot”, said Laith Khalaf, head of investment analysis at AJ Bell.

A period of volatility in the mortgage market has seen some major lenders temporarily pausing mortgage applications and increasing their rates in recent days.

HSBC UK briefly took some mortgage products available through brokers off the market last week as it faced high demand from homeowners. It is set to raise mortgage rates for the second time this week.

Santander also temporarily paused some mortgage applications earlier in the week in light of “changing market conditions”.

Around 1.3 million households are expected to reach the end of their fixed-rate term from April to the end of the year, the Bank of England said last month.

The average mortgage holder is looking at a £200 increase in their monthly repayments if their rate goes up by three percentage points.

Misery

Myron Jobson, senior personal finance analyst for Interactive Investor, said more “mortgage misery looms” for borrowers set to renew their deal in the second half of this year, “the majority of which were set at interest rates below 2%”.

But the Bank of England has said it will continue to raise interest rates so long as it sees signs of inflationary pressure.

Economists have pointed out that important indicators of persistent inflation, namely price increases in the service sector and wage growth, have remained elevated, which is likely to worry Monetary Policy Committee (MPC) policymakers.

“The scale of the market reaction indicates a lack of confidence that the Bank has done enough so far to bring inflation under control,” Andrew Goodwin, chief UK economist for Oxford Economics said.

“It also implies that the MPC will be willing to act further.”

Financial markets are now predicting there to be four further rate hikes, taking it to a peak of 5.75%, analysts said.

“A few hawkish comments from the Bank of England, or some more ugly inflation data, could easily tip those expectations up to 6%,” Mr Khalaf said.