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  • Writer's pictureJoshua Ellard

Bank of England raises rates to 3.5%

The Bank of England has officially increased the base rate by 50 basis points to 3.5%, a level not seen by the UK since 10 April 2008. Unlike yesterday’s inflation figures, this comes as no surprise as the Bank of England scrambles to control price levels. It is intuitive to suggest this will impact millions of homeowners across the country, with standard variable rates, 2-year fixed rates and 5-year fixed rates all expected to further increase.

Affordability remains at the forefront of the property sector. As rates increase, the amount one can borrow to purchase a property decreases. Put simply, many buyers can no longer meet the asking price of sellers, forcing anyone wanting to sell to have to cut prices. This has been echoed by recent reports from estate agents, stating that upwards of 50% of recent house purchases have been below the value asked for by the seller. This is a trend we will continue to see deep into next year and perhaps longer.

If we assume the average house price in the UK to be £268,788, as reported by the Nationwide House Price Index for October, with 25 years remaining, a 0.5% rise could mean an average increase in monthly mortgage payments of £78. Whilst this may concern those homeowners who are on variable rate mortgages, of which there are over 2 million, the effect on fixed rate products may not be so drastic. We saw swap rates, the rate at which lenders borrow money, increase dramatically post Kwarteng’s ‘mini-budget’. This led to disproportionately large increases in the cost of 2- and 5-year fixed mortgages. This was entirely reactionary as the market was inundated with uncertainty. Although, we have seen rates come down slightly, I believe some lenders have priced future rate increases into their current products. We are seeing current 5-year fixed mortgages between 5-6%. Whilst we may see some increase, I do not expect the full burden to fall on borrowers. However, it is expected that those currently on a fixed rate mortgage that expires next year will see an average increase of £3,000 per annum in household expenditure.

This succeeds yesterdays unexpected, but welcome news from the Office for National Statistics (ONS) that Consumer Price Inflation (CPI) fell in November to 10.7% from its 41-year high of 11.1% in October. To fully understand the implications of this, we must first understand what it means. Although, it may sound positive, it does still mean that the price of goods and services is increasing at alarming levels, just at a slightly lower rate than the month prior. This does little to ease the minds of those struggling with the cost-of-living crisis and is only accentuated by the fact wages have done very little to keep up with the soaring cost of living.

Many are suggesting we are past the peak of inflation levels, but this may in fact, not be the case. Following a ‘mild autumn’, the last week has seen a dramatic drop in temperatures across the country, leading to a surge in demand for energy, subsequently increasing prices. The true effect of rising energy prices and its effect on inflation, is yet to be realised.

Unfortunately, the likelihood of this being the last hike is slim. We are expecting further increases up to 5%, until we reach a point at which the BoE has inflation firmly under control.


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