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Homeowners set for crippling rate rise?

The Bank of England may be forced raise the base rate to 7.5% as a result of rising inflation...

Mortgage borrowers could be facing a massive rise in their mortgage repayments with a typical monthly payment rising to £1,037.08 per month from the current £818.75* (a difference of £218.33 a month) if the group of leading economists making the prediction are right and the base rate rises to 7.5 per cent to quell inflation. 

This means borrowers could eventually be paying more than £2,600 extra per year following on from the three rate rises been experienced since August 2006. 

If the group's predictions are right then mortgage borrowers are going to have it hard in the near future because this could mean standard variable rates close to ten per cent. The last time mortgage rates neared this level was 15 years ago, with one in five (19 per cent) borrowers on the lender's SVR.

Stuart Glendinning, managing director of moneysupermarket.com, commented:

“Last week's inflation figures have sparked a riot. Leading economists have written an open letter to the MPC forecasting rates are going to rise, with some predictions suggesting a 2.25 per cent rise within a year or two. This makes the likelihood of a rate increase at the next announcement from the MPC an almost certainty, perhaps with the question being: will the rate rise by the normal 0.25 per cent or even 0.5 per cent?

Rising rates could depress the market

Mr Glendinning further observed:

“Our research shows there is typically a two per cent differential between the Bank of England base rate (currently 5.25 per cent) and a lender's typical Standard Variable Rate (SVR) (Halifax's SVR is currently 7.25 per cent). So, a base rate of 7.5 per cent could mean a typical mortgage SVR of 9.5 per cent. In 1992 the base rate went from 9.88 per cent (in May) gradually to 6.88 per cent (in November) – in November 1992 Hanley Economic BS had an SVR of 9.9 per cent, which then went down to 9.2 per cent in December”.