Mortgage shock as interest rates raised to 14-year high

MILLIONS of homeowners face yet more mortgage misery after interest rates reached a 14-year high.

The Bank of England raised its base rate by 0.5 percentage points to 2.25 per cent yesterday – the seventh rise since december – as it battles inflation.

Experts warned of more pain to come, with the rate predicted to peak at 4.75 per cent by the middle of next year. Yesterday’s hike was smaller than the 0.75 percentage points some had hoped for, as inflation hovers around its 40year high at 9.9 per cent.

But rate-setters are keen to wait and see what announcements the new Chancellor makes in his mini-Budget today. The Bank is also worried that the UK could already be in a recession, which would be exacerbated by large rate hikes.

The economy shrank by 0.1 per cent between April and June, and the Bank thinks it contracted by a similar amount in the third quarter, meeting the criteria for recession. But officials said a deeper recession, which they had predicted in August, may be averted and inflation will be lower due to the energy price cap.

Borrowers with fixed mortgage deals will be protected from interest rate hikes until their deal expires. But there are around 2million customers on variable rate loans who face almost immediate bill increases. A borrower with a £150,000 mortgage on the average standard variable rate will pay an extra £88 a month, or £1,056 a year, according to figures from broker L&C Mortgages.

Those with loans of £450,000 will see bills soar by £265 a month, or £3,180 a year. There are also 1.8million borrowers with fixed deals due to end next year, according to trade body UK Finance.

Sarah Coles, analyst at hargreaves Lansdown, warned this group could be in for ‘a horrible surprise’, hit with all rises at once. Parliament’s Treasury Committee was warned yesterday that the shock could prompt a 10 per cent fall in house prices next year.

More optimistically, with Liz Truss’s energy price cap the Bank of England now expects inflation to peak under 11 per cent, down from its August expectations of more than 13 per cent and alarming economists’ forecasts which escalated up to 20 per cent.