Interest rate hike adds £24 a month on to average tracker mortgage payment

Mortgage holders on tracker deals face nearly £24 per month being added to their payments, on average, following the latest Bank of England base rate rise.

Based on the mortgages outstanding, the new 0.25 percentage point rise, which takes the base rate to 5.25%, will add on £23.71 typically to monthly tracker payments, according to figures from trade association UK Finance, adding up to nearly £285 per year.

For homeowners on a standard variable rate (SVR) mortgage, the average payment could increase by £15.14 per month or nearly £182 per year.

SVRs are set by individual lenders and often follow movements in the base rate.

The latest base rate increase is the 14th in a row.

Taking all 14 base rate rises into account, average monthly payments will have increased by £488.50 for tracker deals and, assuming base rate rises have been fully passed on, £311.90 for SVRs.

This adds up to an average annual increase of £5,862 for homeowners on tracker mortgages and £3,742.80 for SVR customers.

The Bank of England uses base rate rises as a tool to cool inflation.

Mortgage rates have jumped as inflation has been stubbornly high, but there has been a bigger-than-expected slowing in inflation recently. UK Consumer Prices Index (CPI) inflation was 7.9% in June, slowing from 8.7% in May, according to the Office for National Statistics (ONS).

This has fuelled expectations that the base rate may not need to climb so high.

Around eight in 10 (81%) homeowner mortgages outstanding are fixed-rate deals – but these households could be in for a bill shock when their current deal ends.

Around 800,000 fixed-rate deals are ending in the second half of 2023 and 1.6 million deals are due to end in 2024, according to UK Finance’s figures.

Richard Lane, director of external affairs at StepChange Debt Charity, said: “Those who have already fixed onto a new mortgage rate in the last few months will be facing significantly higher monthly payments, while many landlords have already passed on higher debt servicing costs to their tenants, making the private rented sector increasingly unaffordable to renters on low and middle incomes.”

Richard Donnell, executive director of research at property website Zoopla, said: “For homeowners and would-be buyers who are impacted by mortgage rates, it’s important to note that the impact is not uniform across the UK.

“Higher mortgage rates hit harder in higher value markets in southern England, where a larger deposit and income are required to buy with a mortgage. In contrast, in the north of England and Scotland, house prices are still rising as the impact of higher mortgage rates is less pronounced.”

UK Finance has said it expects that the number of households in arrears in 2023 to remain below 1% of outstanding mortgages.

Mortgage lenders representing over 90% of the mortgage market have signed up to the Government’s new mortgage charter, committing them to additional support for borrowers.

This includes giving homeowners approaching the end of a fixed-rate mortgage the chance to lock in a deal and request a better like-for-like deal if rates change up to six months ahead and a guarantee of no repossession within 12 months of a first missed payment.

Lenders offer a range of mortgage support options, tailored to customers’ needs.

Fixed mortgage rates have been holding steady in recent days. According to Moneyfactscompare.co.uk, the average two-year fixed-rate homeowner mortgage rate on the market is 6.85%, which is unchanged from Wednesday.

Back at the start of December 2021, the average two-year fixed-rate mortgage was 2.34%.

The average five-year fixed homeowner mortgage rate is 6.36%, down from an average rate of 6.37% on Wednesday. The average five-year fix was 2.64% in December 2021.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Lenders have already priced this increase into their fixed rates so we don’t expect pricing to rise. Indeed, a number of lenders have reduced fixed rates in the past few days on the back of calmer swaps, which underpin the pricing of fixed-rate mortgages.

“The extreme volatility we have seen in swaps over the past few weeks has settled following June’s better-than-expected inflation data.

“However, while other lenders may reduce their fixed rates, long gone are the days of rock-bottom pricing. Borrowers due to come off cheap fixes face a real payment shock, so it is important to plan ahead as much as possible and act now.”

Andrew Montlake, managing director of Coreco mortgage brokers, said: “Although tracker mortgages will increase on the back of today’s decision, we may well see fixed rates continue to ease slightly, especially as lenders look to get a better start to next year.”

Matt Smith, Rightmove’s mortgage expert, said more positive inflation figures “have given the market renewed confidence that inflation will continue to fall, and the base rate won’t have to go as high as previously feared, meaning lenders can tentatively start to reduce rates”.

Savers meanwhile can now typically find a one-year deal at 5.21% and an easy access savings rate at 2.81%, Moneyfacts said.

With competition rising in the savings market, savers should shop around and compare deals.

Rachel Springall, a finance expert at Moneyfactscompare.co.uk, said: “It is imperative savers take time to review their existing accounts and not presume any base rate rise will be passed onto them, as this is never guaranteed.

“Those savers who have their cash sitting in an easy access account for convenience may find their loyalty is not being repaid.”

While savings rates have been improving, around £250 billion has been sitting in deposits which earn no interest.

A new consumer duty came into force from July 31 for financial firms, requiring them to put consumers at the heart of what they do, including when designing products and offering customer service.

The duty is overseen by the Financial Conduct Authority (FCA), which said on Monday that firms offering the lowest savings rates will be required to justify by the end of August how those rates offer fair value. It has said it will take robust action by the end of 2023 against those who cannot demonstrate fair value.

The FCA made the announcement on Monday as it set out a 14-point action plan to make sure banks and building societies are passing on interest rate rises appropriately to savers.

As part of the plan, the regulator will review the timing of providers’ savings rate changes each time there is a base rate change.

The FCA has also said it expects firms to take action to prompt their customers in lower-paying savings accounts or non-interest-bearing accounts to consider alternatives.

Its previous research also indicates that around three in 10 adults do not have a savings account of any type – potentially putting them at risk if they suddenly need to cover an unexpected bill.

Jenny Ross, editor of Which? Money, said: “While some banks have been quick to pass on higher rates to mortgage holders, they’ve dragged their heels on handing savers better deals. Banks mustn’t treat mortgage holders and savers differently by raising rates at different times.

“The Financial Conduct Authority this week ordered firms to speed up the pace at which changes are passed on, with providers offering the lowest rates needing to justify their prices by the end of the month. The regulator must continue to hold banks’ feet to the fire – with tough action for those that continue to fall short.”

Shortly after the Bank’s base rate hike, HSBC UK and first direct announced plans to raise some savings rates from August 10.

Among the increases, first direct’s Savings Account and HSBC UK’s Flexible Saver rates will both increase by 0.25 percentage points, from 1.75% to 2.00%. Both deals are instant access accounts.

Nationwide Building Society also announced savings rate increases, including a 0.75 percentage point increase to its one-year Triple Access Online Isa, taking the rate to 4.25%.

Nationwide’s rates on its instant access accounts, including the Instant Access Saver, Instant Isa Saver and Cashbuilder, will increase by 0.10 percentage points, to either 2.25%, 2.30% or 2.35%, depending on the amounts saved.

Marcus by Goldman Sachs also notified savers of immediate rate increases.

It told customers the underlying rates on its Online Savings Account, Cash Isa and Maturity Saver have increased from 3.64% to 3.94%. Holders of an Online Savings Account or Cash Isa with a bonus rate will receive a new total rate of 4.30%.