Millions face higher mortgage bills as bank of england raises interest rates

MILLIONS of homeowners face higher mortgage bills as bank of england poised to raise rates this week.

Interest rates are expected to rise 75 basis points from 2.25% to 3% on thursday.

Typical mortgage holders could see their bills rise by £123 if the boe raises interest rates this week image credit: getty

The bank of england (boe) has already raised the prime rate seven times this year.

Interest rates last rose on 22. September from 1.75% to 2.25.

The move will make borrowing costs, including loans, credit cards and mortgage repayments, more expensive.

And it means more misery for households already struggling with a living crisis.

Raising interest rates should encourage people to save rather than spend, which in theory should help control rampant inflation.

The bank of england now expects inflation to peak at 11 percent this october, up from its earlier forecast of 13.3 percent in august.

This is an increase from the previous rate of 2.25%, and banks are expected to pass on the recent increase to borrowers.

Here are the four things to watch out for this thursday.

1. Mortgage rates are rising

According to hargreaves lansdown, with the standard variable rate (SVR), the average mortgage holder's payments could be reduced by 1.476 £ per year increase when the prime rate reaches 3%.

This means that a household with a mortgage of 250.000 £ over 25 years at an average SVR rate of 5.4% will increase his monthly payments by £ 123.

And around 800.000 homeowners with a tracker mortgage that is directly linked to the prime rate will see an immediate increase.

Exactly how much more your bill will cost depends on the type of mortgage you have.

Those with fixed interest rates are safe for now – but face a huge increase in borrowing costs when it comes time to restructure debt.

Some 2.2 million borrowers are expected to end a deal they took out when the prime rate was at a historic low of 0.1%.

With a fixed deal, you secure an interest rate for a certain period of time, with payments staying the same.

Sarah coles, personal finance expert at hargreaves lansdown, said: 'for anyone who has a variable rate mortgage – such as a standard variable rate mortgage or a tracker mortgage – much of that rate rise is likely to go into your monthly payments quickly.

"For anyone whose fixed-rate contract has come to an end and who has decided to return to SVR and wait to see what happens to fixed rates, this could end up causing the kind of headache you may have been trying to avoid."

However, nick morrey, technical director at mortgage broker coreco, said, "we don't expect much to happen to mortgage rates when the prime rate reaches 3%.

"This is because interest rates have risen so much that a 0.75% increase is already factored into it, because it was originally expected that the prime rate would peak at 5% next year.

"However, the prime rate is now expected to peak at 4%, and now we are actually seeing small reductions in mortgage rates across the board."

Interest rates have been lowered on some fixed-rate mortgage deals in recent days.

The sun reported that a number of lenders began cutting their deals last week.

The average interest rate for two-year fixed mortgages has declined since its peak on 20. October rate down 0.17 percentage points – from 6.65% to 6.48%.

And the average interest rates on five-year fixed-rate mortgages have also dropped 0.18 percentage points, from 6.51% to 6.33%.

2. Credit card and loan interest rates could rise

The cost of borrowing through loans, credit cards and overdrafts could also rise, as banks are likely to pass on the increased interest rate.

Certain loans you already have, such as a personal loan or auto financing, usually stay the same because you've already agreed on the interest rate.

But interest rates on future loans might be higher, and lenders might increase interest rates on credit cards and overdrafts – although they have to inform you about this beforehand.

You can cancel a credit card if you want, and have 60 days to pay off any outstanding balance.

Average interest rates on personal loans are already at their highest level since october last year.

Average overdraft interest rates are 20.35% and 29.8% for credit cards, according to moneyfacts.

3. Savers may get better rates

Savers could experience further relief, since the banks continue to fight with market-leading interest rates against it.

An increase in interest rates is generally good news for savers, especially after receiving very low interest rates on their money for a long time.

Besides low interest rates, high inflation can reduce the value of your savings.

So if you have £100 in the bank this year and inflation is 10%, the real purchasing power of that money will be reduced to £90 next year.

Another rate hike could result in banks passing on higher interest rates to savers – although they are usually much slower to act than they are to pass on higher interest rates for borrowing.

This means that savings rates increase slowly rather than change immediately.

Sarah coles said, "for savers, it's unlikely that an overnight rate hike will result in a big bang, with interest rates rising significantly.

"As the major high-street banks are stuffed with lockdown savings, they are happy to continue offering abysmal interest rates – usually below half a percent.

"This means that it is up to the smaller, newer and online banks to raise the interest rates."

Anyone who is currently receiving a low interest rate on easily accessible savings, it might be worth looking for a better rate after an interest rate increase and move your money around.

According to moneyfacts, savers can currently get up to 2.81% on easy-access savings accounts and up to 5.1% on certain time deposit accounts.

4. Inflation remains high for the time being

Rising inflation indicates that the cost of goods and services is rising, so your money doesn't matter as much as before.

But to fight inflation, the bank of england chooses to raise interest rates, which reduced purchasing power and demand, which in turn lowered prices.

Inflation in the UK reached 10.1% in september, driven by rising food and energy prices.

Inflation last hit 10.1% in july – the biggest rise in inflation since 1997.

This led to fears from the governor of the bank of england (boe) that the british economy could be heading for a 15-month recession.

Boe predicts inflation will peak at 11% in october and then stay above 10% a few months after that – even if it raises interest rates in the meantime.

When a country falls into recession, when its economy shrinks for a long period of time.

It is calculated using what is known as gross domestic product (GDP), which in the UK is the value of all goods and services in pounds.

Generally speaking, a recession is when GDP has fallen for more than two quarters (or six months).

The central bank had previously forecast that the economy would grow in the current fiscal quarter, but said it now expects gross domestic product (GDP) to fall 0.1%.

It comes after a reported 0.2% drop in GDP in the second quarter and would mean the economy is currently in recession.

Job losses are a common symptom of recession as companies try to cut costs to stay afloat.