Interest rates could rise by as much as 0.5% tomorrow after inflation figures showed no improvement to the high cost of living.
Experts are issuing advice to homeowners who will be most affected by a potential rate rise tomorrow – including those due to exit a fixed rate deal and those struggling with mortgage repayments.
The Office for National Statistics revealed this morning inflation remained at 8.7% in May which is the same as April. It means the cost of our goods and services has climbed by 8.7% between May 2022 and May 2023.
The Bank of England’s (BoE) target for inflation is 2% and the primary tactic being deployed to reduce it to this level is to raise interest rates.
Currently interest rates are at 4.5% but it is now being predicted the BoE will increase them by 0.25% or even as much as 0.5% when they meet tomorrow (Thursday 22 June).
Danni Hewson, head of financial analysis, at AJ Bell, explained more: “Inflation had been expected to fall – at least a bit – but it hasn’t obliged, remaining stubbornly sticky and cementing the prospect of a rate rise tomorrow as well as raising expectation that the hike will be higher than had been previously anticipated.
“There is a tiny bit of good news hidden in this troubling update from the ONS and that’s the rate at which food prices are rising, which has slowed, but it will be little comfort to all those facing huge increases in their monthly mortgage payments.”
She added: “There will be more pressure on the government to step in and help struggling homeowners, especially as an election creeps ever closer.”
What does high inflation mean for those remortgaging?
The inflation data comes following weeks of turmoil for mortgages with products being removed from the market at short notice and being re-introduced with higher rates as lenders anticipate further interest rate hikes.
According to Moneyfactscompare.co.uk, a two-year fixed rate mortgage is now 6.07%.
With 1.4 million homeowners due to remortgage this year, the new higher rate mortgage market is likely to hit many house households who are already struggling with the cost-of-living crisis.
Paula Higgins, Chief Executive of The HomeOwners Alliance said “While rates look horribly high, and they are, they still aren’t as bad as your lender’s Standard Variable Rate (SVR) – which could be as high as 8%. This is the rate you default to if you don’t switch in time. So , if your deal ends later this year, don’t “wait and see”.
“You can lock in a mortgage rate now and keep it under review. Check what your current lender has to offer and use a fee-free broker to search the market for you to find the best deal. Keep on top of the best mortgage rates on offer.”
The Homeowners Alliance has drawn up the following table to convey what homeowners on a 25-year term would pay depending on their rate and mortgage balance. Higgins said: “These figures show a stark increase in monthly mortgage payments for those coming off fixed deals.
“But they also illustrate how much you may have to pay if your deal ends and you roll onto your lender’s SVR.”
| Mortgage balance | 1% mortgage rate | 2% mortgage rate | 4% mortgage rate | 6% mortgage rate | Average SVR of 7.5% |
| £150,000 | £565 | £636 | £792 | £966 | £1,108 |
| £200,000 | £754 | £848 | £1,056 | £1,289 | £1,478 |
| £300,000 | £1,131 | £1,272 | £1,584 | £1,933 | £2,217 |
| £400,000 | £1,507 | £1,695 | £2,111 | £2,577 | £2,956 |
You can find more advice about remortgaging here.
What to do if you are struggling to meet your mortgage repayments?
If you are have recently remortgaged to a new, higher rate or are on a variable rate mortgage which is following the Bank of England’s base rate, you may already be seeing more pressure on your repayments.
Maybe you are simply struggling with your mortgage due to the high cost of living.
Whatever the reason, if you are facing difficulties, Higgins said: “Just one missed mortgage payment could affect your ability to borrow money from any lenders in future. So, if you’re worried, speak to your lender.”
She explained they would be able to offer some of the following options for you:
- Extend your mortgage term, for example from 20 to 25 years, so you can pay less each month (although you’ll pay more interest overall)
- Reduce your monthly payments for a set period of time, while you sort out your finances
- Offer a mortgage holiday: This is when you take a break from repaying your mortgage, although interest continues to accrue during this time.
- Switch to interest-only repayments This means only paying off the monthly interest owed on your debt and not any of the capital; it would cut your monthly mortgage payments but you’ll need to have a plan for how you will eventually repay the capital.
