Borrowing costs

Bank of England raises borrowing costs – industry reaction

In a decision that will come as no surprise, the Bank of England’s monetary policy committee raised borrowing costs by 50 basis points, taking UK interest rates to a 13-year high at 1, 75%.

It is the biggest rise in UK interest rates since 1995, but the rate remains well below what was considered “normal” before the 2008 financial crisis.

The MPC made a decision in the face of rising inflation and projections that the UK will enter recession in the last three months of the year.

Graphic courtesy of JLL

Industry reactions

Simon Gammon, Managing Partner, Knight Frank Finance:

“Mortgage rates now change daily and lenders are giving borrowers and brokers little notice of price revisions.

“We see two important impacts on borrowers. First, some homeowners nearing the end of their tenure face shock when they come to refinance, as they are unable to borrow as much as they had hoped.

“Secondly, those looking to buy are realizing that properties once available are now out of reach. The question for them is no longer ‘how much can I borrow?’ but ‘how much can I afford to borrow?’ “. This is a subtle but very important shift in borrower behavior that is causing people to reassess the price at which they can buy.

Nicholas Hyett, Investment Analyst, Wealth Club:

“The Bank of England is catching up after some exceptional rate hikes from the ECB and the Federal Reserve last month. The resulting rate hike may be the biggest in nearly 30 years. , but it was also widely expected and the market reaction was modest Instead, the real focus today is how far the bank is willing to go as it seeks to bring inflation back to its target of 2%.

“The current spike in inflation is being fueled by global food and energy prices, and higher UK interest rates will do little to ease these pressures. A stronger pound sterling has the potential to provide some relief.However, rising rates in the US and Europe mean that BoE actions have not helped the pound much, and the pound is currently trading near its lowest level against the dollar for more than 40 years.

“The risk now is that higher interest rates start to squeeze consumer and commercial borrowers too hard, strangling the life of the economy without significantly easing the cost of living crisis.

“Markets still think the Bank has a rate hike or two in the tank, but to some extent UK monetary policy is now caught up in global forces over which the Bank has little control. Inflation will rise or fall depending on what happens in Ukraine and not Threadneedle Street, and rate decisions are dictated by the movements of other central banks as much as the MPC.

Tom Bill, Head of UK Residential Research at Knight Frank:

“Rising rates will dampen demand in the UK property market, but there will be no precipice. With mortgage deals lasting up to six months and the majority of homeowners on fixed rate deals, the impact will be more gradual.

“The Bank of England’s decision is a step back towards normality after 13 years of ultra-low borrowing costs. At the same time, supply is rebuilding following the distorting effects of the pandemic and the stamp duty exemption.

“As rates and supply normalize, the current period of double-digit house price growth will come to an end.”

Iain McKenzie, CEO of the Guild of Real Estate Professionals:

“Fighting inflation and reducing the cost of living is the number one priority right now. Ultimately, this is key to ensuring people can meet their mortgage and rent payments.

“Those with a tracker mortgage or those switching to a standard variable rate will see their repayments increase again, adding to the pain of the soaring cost of energy and essentials.

“Homeowners with fixed rate mortgages are in a better position, with no immediate effect on repayments. Keep an eye on when you’re due to pay off your mortgage, as our research shows that around 1.5 million fixed-rate mortgages will end this year.

“These decisions could also affect housing prices in the coming months. Over the past two years, we’ve seen unprecedented demand for real estate, largely due to ultra-low interest rates that have made it easier to get a mortgage.

“As more and more people wanted to get on the real estate ladder, house prices soared. Another consecutive rise in interest rates could make potential buyers more hesitant to take out a mortgage If this is the case, we are likely to see house prices cool down to entice more people to buy.

Jason Tebb, CEO of OnTheMarket:

“This latest rate hike was widely expected, given the persistence of high inflation, but we don’t expect it to undo the positive sentiment among buyers and sellers in the housing market.

“As long as buyers remain confident that they will get the mortgages they need and are able to afford them, rate increases, while unwelcome, are unlikely to cause a drag.

“Even with this half-point hike, it’s still a relatively cheap time to borrow money; in a few months, the picture could be very different.

Frances McDonald, Savills Research Analyst:

“Today’s increase was not unexpected and will have factored into many buying decisions, although successive rate hikes are no doubt contributing to slower house price growth. . Prices are in line with our forecast assumptions for 2022, with the assumption that annual price growth will slow to 7.5% by the end of the year, from 11.0% currently.

“The five base rate hikes we have already seen in the past six months have caused the cost of mortgage debt to rise significantly. For someone borrowing a 75% mortgage, the average 2-year fixed rate has more than doubled over the year, from 1.39% in June 2021 to 2.88% in June 2022.

“While these rate hikes will have the biggest impact on new market entrants and those on variable or tracker mortgages, they will also affect those looking to move up the housing ladder, especially given the strong growth in prices we’ve seen lately, unless we see lenders absorbing some of the increases.