Chairman of Cornerstone Group International, David Hannah, discusses the impact of the rise in interest rates on UK households:
“We’ve witnessed a fractured mortgage market recently due to most of the major lenders withdrawing or increasing rates on their mortgage products in preparation for today’s interest rate announcement which is creating a dire situation for both existing and prospective homeowners across the country. 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 six percent 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.
“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.”
Interest rates have risen for the fourteenth consecutive time by 0.25 percentage points, pushing the benchmark rate to 5.25% up from 5% as the Bank of England continues to try to control stubbornly high inflation. 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.
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. This comes after data from the Nationwide Building Society this week showed that property values declined by 3.8% in July – marking the biggest drop in 14 years – with the affordability of mortgages being attributed as the main factor for this drop.