London, July 4: Homeowners and renters in the UK faced further grim news Tuesday as mortgage rates hit levels not seen since unfunded tax cuts announced by the government last fall spooked investors.
With the Bank of England raising interest rates to a 15-year high of 5 per cent to battle high inflation, it's natural for lenders to increase the cost of borrowing to consumers and businesses. But inflation is proving more stubborn than expected, and the bank is expected to keep hiking rates, potentially to 6 per cent, a level not seen since 2001. SCO Summit 2023: India Reiterates Opposition to China's Belt and Road Initiative.
That prospect is having a knock-on effect in the cost of mortgages. According to financial information company Moneyfacts, the average rate for a five-year fixed rate mortgage in the UK hit 6.01 per cent on Tuesday from 5.97 per cent the previous day.
That's the highest since the aftermath of last fall's tax plan from Liz Truss' short-lived government, which caused investors to lose faith in the state of Britain's public finances. UK Shocker: Indian-Origin Man Stabbed to Death at Park in England; Teenager Charged.
The worry is that mortgage rates could surpass those levels if the central bank keeps hiking, creating another pain point amid a cost-of-living crisis that has fuelled strikes by workers seeking higher pay.
“It gives me no pleasure to say that we could realistically see some fixed rates reach 7 per cent before the summer is out," said Paul Welch, CEO at London-based mortgage broker LargeMortgageLoans.com.
Rishi Sunak, Truss' replacement as prime minister, made halving consumer price inflation in 2023 to around 5 per cent his central pledge. However, with inflation running at 8.7 per cent in the year to May, there are real doubts as to whether that ambition will be achieved.
While acknowledging Tuesday that inflation is “proving more persistent than people anticipated,” Sunak would not be drawn on the probability of his target being met.
Many homeowners will be cushioned from recent increases as they fixed their mortgages when the central bank's main interest rate was near-zero during the coronavirus pandemic.
However, those whose fixed-rate terms expire over the coming months — more than 1 million households — will face much higher borrowing rates when they look to lock in new deals. Homeowners who are renting out properties also will be tempted to pass on their higher mortgage costs.
Unlike the US, where many homeowners fix their mortgage rates for 30 years, the prevailing habit in the UK is to fix a rate for much shorter periods of time. After that ends, they move to their lender's usually higher variable rate or seek out other deals.
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