Rates may not yet have hit peak, say economists

Borrowers should brace themselves for the possibility of another interest rate rise this year, as economists are warning that this week’s increase to base rates is unlikely to herald the peak of the cycle.

Base rates were increased by a quarter of a point to 5.5 per cent on Thursday – the fourth such rise in nine months. Homeowners on variable rate mortgages have therefore faced a full percentage point hike in their interest rate since last summer. Someone with a £250,000 interest-only mortgage is now typically having to pay around £200 more in monthly mortgage costs than they did a year ago, according to Hamptons International Mortgages.

Jonathan Cornell, technical director at Hamptons, said: “Each base rate increase has only had a minor effect on monthly mortgage payments in isolation. However, when taken together it shows a significant total increase over the year.”

The interest rate rises are intended to put the breaks on the runaway house price growth seen over the past year and to regain some sense of stability in the economy. Last month inflation hit its highest level for 10 years, with the retail price index reaching 4.8 per cent. The Bank of England’s target consumer price inflation measure reached 3.1 per cent.

Economists said the Bank offered few solid clues as to future interest rate movements, but a number expected another quarter point rise some point this year. Mortgage brokers said fixed mortgage rates are currently being priced on the expectation that base rates will hit at least 5.75 per cent.

Howard Archer, chief UK and European economist at Global Insight, said: “Unless data over the next few weeks shows a clear easing in price pressures and softer growth, we suspect that a majority of Monetary Policy Committee members will want to take out some further insurance against the longer-term inflation risks.”

He expected another quarter point rise by August – and maybe as soon as June if consumer price inflation has remained strong.

The latest interest rate rise was widely expected and had little immediate effect on swap rates, which determine the price of fixed-rate lending.

Two-year swap rates, which have been drifting up since the end of March, are currently around 5.9 per cent. Ten-year swap rates, which give a longer-term view of where interest rates will go, are lower at around 5.4 per cent.

Most lenders had already upped the price of their
best fixed-rate mortgage deals in preparation for
this week’s base rate rise.

According to the Council of Mortgage Lenders, almost 90 per cent of first-time buyers have been opting for fixed-rate deals. But mortgage brokers said that borrowers looking to take a mortgage now might be better off with discount variable rates or trackers, as fixed-rate deals are looking increasingly uncompetitive.

The best two-year fixes are currently around 5.3 per cent. But before this week’s rise borrowers could get hold of a discounted variable rate for 4.65 per cent from Newcastle Building Society.

Nick Gardner at Chase De Vere Mortgage Management said: “Rates may be up, but it may make sense to take a variable rate loan now. I think a lot of good variable rates have been overlooked in this climate of rising rates.”

If you can get a variable rate for around 4.9 per cent, it would take at least two further rate rises before this would become more expensive than a two or five-year fix. “Many borrowers will think this is a gamble worth taking,” said Gardner.

However, if you are considering taking a variable rate you should be confident you could afford the repayments if interest rates continue rising. Some economists believe rates will hit 6 per cent before they start coming down again.