Mortgage Rates in the UK Hit Highest Level since Unfunded Tax Cuts
LONDON (AP) — Homeowners and renters in the U.K. are facing further dire news as mortgage rates have reached levels not seen since the government announced unfunded tax cuts last fall, causing investors to become hesitant.
As the Bank of England continues to battle high inflation by raising interest rates to a 15-year high of 5%, lenders are naturally increasing the cost of borrowing for consumers and businesses. However, inflation has proven to be more stubborn than expected, and it is anticipated that the bank will continue to hike rates, potentially reaching 6%, which hasn’t been seen since 2001.
This scenario is having a ripple effect on the cost of mortgages. Financial information company Moneyfacts reports that the average rate for a five-year fixed rate mortgage in the U.K. reached 6.01% on Tuesday, up from 5.97% the previous day.
These rates are the highest since the aftermath of the tax plan announced by Liz Truss’ short-lived government last fall, which caused investors to lose confidence in Britain’s public finances.
The worry is that mortgage rates could surpass these levels if the central bank continues to increase rates, further exacerbating the cost-of-living crisis that has led to strikes by workers demanding higher wages.
Paul Welch, CEO at London-based mortgage broker LargeMortgageLoans.com, stated, “It gives me no pleasure to say that we could realistically see some fixed rates reach 7% before the summer is out.”
Rishi Sunak, Truss’ successor as prime minister, made it a central pledge to halve consumer price inflation to around 5% by 2023. However, with inflation currently running at 8.7% in the year to May, doubts have arisen regarding the achievability of this ambition.
Sunak acknowledged on Tuesday that inflation is “proving more persistent than people anticipated,” but declined to comment on the likelihood of meeting his target.
Many homeowners will be shielded from recent increases as they locked in their mortgages when the central bank’s main interest rate was near-zero during the COVID-19 pandemic.
However, over the next few months, more than 1 million households will face significantly higher borrowing rates as their fixed-rate terms expire and they seek new deals. Homeowners who are renting out properties may also be tempted to pass on these increased mortgage costs.
Unlike the United States, where many homeowners choose to fix their mortgage rates for 30 years, it is customary in the U.K. to fix rates for much shorter periods of time. After that period ends, borrowers typically move to their lender’s usually higher variable rate or explore other options.