The cost of living crisis is something that has hit people across London and the UK pretty hard in the past year. The working-class have particularly struggled, with inflation making general goods and services more expensive, and factors such as the Russia-Ukraine war surging the cost of petrol and the cost of energy and electricity, leaving many in the UK in a position of being unable to pay their utility bills.
In an attempt to combat rising inflation, the Bank of England raised interest rates in August from 1.25% to 1.75%. The 0.5 percentage point increase marks the sixth rise since December 2021 when the rate stood at just 0.1%. It also puts the rate at its highest level for 14 years.
So, what does the climbing cost of living mean for mortgage rates around the country?
Well, we’ve already been witnessing rising property prices, which have increased by nearly 20% over the last two years. House prices have risen on the back of several things, including changes in how people see their homes and how they live and work (i.e. working from home), a lack of properties on the market and government tax incentives.
As far as mortgages go, rising interest rates and the soaring cost of living will inevitably impact mortgage budgets.
In recent years, given the property price hike, people have been borrowing more on their mortgages than in pre-Covid years in order to afford the homes that they’re trying to buy.
This may not have been such an issue when the base rate of interest was low – as it has been for most of the last 10 years – now, with higher interest rates, this could make mortgages more expensive, especially if combined with the rising rate of inflation and costs of living.
As far as the higher interest rates go, those on variable-rate mortgages, which is around the two million-mark, will see an almost immediate rise in their monthly repayments. For example, a mortgage rate rising from 3.5% to 4%, which could certainly occur as a result of the rising base interest rates, will cost homeowners almost an extra £60 a month on a £200,000 loan.
For first-time buyers, the situation could be even worse. The first-time buyer business boomed following the Covid-19 lockdowns. Working from home and the inability to travel to go on holiday helped a lot of young people save for deposits, and the number of first-time buyers was up 35% in 2020, according to data from Halifax.
However, that figure is set to slow down, as mortgage lenders tighten affordability criteria, interest rates rise, and higher rent and household bills start to mount up. This may see many first-time buyers priced out of the market, potentially creating a knock-on effect further up the property ladder.
Remortgagers will also be faced with higher mortgage costs when they come to source a deal, with the cost of new fixed rates having already factored the latest rise into the price.
