Some thoughts on increasing mortgage rates

Some thoughts on increasing mortgage rates

By Steve Herbert, Wellbeing & Benefits Director

It is a rather bleak outlook for those with mortgage and other debts…

Few will be unaware of the so called “mini” budget announcement by Chancellor of the Exchequer Kwasi Kwarteng on the 23rd of September 2022.

That statement appears to have unleashed a vast wave of differing sentiment, concerns, and above all economic and financial market uncertainty. One of the outcomes of this uncertainty is that the Bank of England (BoE) base rate is now rising more sharply than previously expected, with that rate predicted to reach around 5% by the middle of 2023. This builds on the seven successive rate changes we have already seen from the BoE in recent months, and would be more than double the current rate of 2.25%.

The expected rate rises will increase the cost of borrowing for those with variable rate or tracker mortgages. It will also be an issue for all those expecting to reach the end of their fixed-rate mortgage period in the next few months.

Yet the scale of the problem is possibly hidden by reference to historical interest rates, which were often much higher than today. Those that can recall such times often point to the 1980’s and 1990’s when interest rates were routinely in double figures. The argument so often advanced is that interest rates in 2022 are tiny by comparison, and therefore the relatively small increases being announced should not pose that much of a problem for borrowers.

Yet that simple analogy is dangerously flawed. For interest rates were indeed very much higher last century, but conversely the amount of debt per household was significantly less.

The ultra-low interest-rate environment that the UK has experienced since the 2008 Credit Crunch has led to a supply of “cheap” finance, which in turn has fuelled an already expensive housing market. The result is that whilst interest rates have been exceptionally low, the total value of mortgage debt is far, far higher than it has been in the past.

But don’t take my word for it. This quote from Sky News’ Ed Conway captures the issue rather well.

“while headline interest rates might have been just over 11% in 1988, adjust that for the fact that mortgage holders these days are considerably more indebted, with lower incomes vs their repayments, and that’s equivalent to about 4.6% in today’s market. An interest rate of 6% today is about the same as experienced in the housing market in 1989, when headline interest rates were nearly 14%.”

It is also worth noting that other forms of borrowing – most notably credit card debt – is often exposed to increasing interest rates too.
The reality is that these seemingly small increases in interest rates announced by the BoE are anything but minimal to those with significant debts. They are also a potentially massive obstacle for first-time house buyers just about to enter the market. For an indication as to what these changes may mean in terms of monthly repayments, please take a look at this page from the BBC News website.

As a nation we need to accept that this is going to be a real problem for millions of people – particularly as we are already facing the challenges of inflation and the cost-of-living crisis.

There are no easy answers here, but we will add some further content on this subject to the hub over the next few weeks. In the meantime, we would encourage you to work through our “four steps to financial health” videos to see if there are any practical steps you can take to help you through the interest rate and economic challenges that the UK is now experiencing.

Finally – and as we mention often in the videos – there is plenty of support and help for those really struggling to pay. So please don’t panic, but we would encourage early action to assess the problem and identify your best response.