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Households brace for ‘longest recession in 100 years’ – but there may be mortgage relief despite huge interest rate hike

HOUSEHOLDS are bracing for two years of financial pain as the Bank of England warned of the ‘longest recession since the 1920s’ today.

Despite the biggest interest rate rise in 33 years – an increase of 0.75 percentage points to 3% – there may be some relief on the way for homeowners.

Interest rates hit 3% after the Bank of England raised them by 75 basis points
Interest rates rose from 2.25% to 3% today

How fixed mortgage rates have increased since September 11

The Bank used today’s announcement as an opportunity to revise its predictions on how much interest rates will rise in future, and this may bring some relief on mortgage bills.

After the Mini-Budget it had warned that they would hit 6% next year, which caused mortgage lenders to hike fixed bills.

However, today it said that rates would hit a maximum of 4.6%.

This opens the way for lenders to reduce some rates. Lenders price mortgages based on what financial markets predict interest rates will be in the next few years, rather than what the current interest rate is.

In an unprecedented move this evening, Barclays became the first bank to cut bills for mortgage customers on standard variable rates, known as SVRs.

Over 2million households are on SVRs and they usually rise when interest rates are increased.

However, it has not changed any of the rates on its fixed-rate products.

And there is a glimmer of good news for the 2million households having to remortgage within the next year.

Millions are facing rises – but they won’t be by as much as feared due to today’s revision in rates.

Michael Hewson at CMC Markets described the move from the BoE as: “Operation Protect the Housing Market”.

Sterling fell as much as 2% against the dollar to a session low of $1.11 following the announcement.

However, the bank did issue a gloomy outlook for the economy, after already warning that the UK will enter recession, during the last interest rate decision.

But if interest rates peak higher at 5% the Bank has forecast Britain will face a downturn lasting two years.

This would mean that the UK could suffer the longest recession since the 1920s, the Bank warned.

The recession is expected to last from the end of this year until the end of 2024 – longer than the last financial crisis in 2008 and the gloom of the early 1990s.

Economists have warned that while interest rates are currently lower than in previous recessions, the situation is tougher for Brits because homes are less affordable and people have built up more debt over the past 15 years of cheap and easy credit.

The economy is expected to shrink by 2.9% over the next two years, a shallower recession than in the credit crunch which was a more painful 6.3%.

The Bank has acted to increase interest rates to try and put a lid on runaway inflation.

The Bank expects inflation to hit 11% by end of this year and then fall sharply from the middle of next year.

Chancellor Jeremy Hunt said: “Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country.

“That is why this government’s number one priority is to grip inflation, and today the Bank has taken action in line with their objective to return inflation to target.”

Last night the US central bank, the Federal Reserve, increased interest rates by 0.75 percentage points.

This is the eighth consecutive time that the Bank of England has hiked the base rate.

Interest rates last rose from 1.75% to 2.25% on September 22.

But what does this mean for your finances? We’ve explained all below.

What does it mean for mortgages?

Exactly what will happen to your bill will depend on the type of mortgage you have – and this is unchartered territory.

Around 800,000 homeowners on a tracker mortgage directly linked to the base rate should see a rise.

Barclays has confirmed to The Sun that new customers will pay more from today and existing homeowners from December 1.

The bank will also cut SVR rates by 0.25 percentage points from December 1.

Households are used to mortgage rates rising when the interest rate goes up.

However, today’s revision of interest rates for the future has already led one major lender – Barclays – to cut SVR rates from December 1.

Those on a fixed rate are safe for now – but they may face a jump in borrowing costs when they come to remortgage.

Around 2.2million borrowers are due to come to the end of a deal that they fixed when the base rate was at a historic low of 0.1%.

On a fixed deal you lock in a rate for a certain period of time which keeps payments the same.

For example, someone taking out a £250,000 mortgage over 25 years back in November 2021 would have expected to pay £1,100 a month.

But if someone took out the same two-year fix now they’d expect to pay £1,683 a month – up £583 on last year.

But as the Bank of England now expects interest rates to peak at 4.5% – lower than the previous 6% experts had warned of – it means they may face a less severe rise than previously feared.

How fixed mortgage payments have risen since last year

Some fixed mortgage deals have had their rates reduced in recent days. Barclays confirmed to The Sun that there was no change to fixed rates.

The Sun reported that a number of lenders started cutting their deals last week.

The average two-year-fixed mortgage rate is now down by 0.17% points since its high on October 20 – from 6.65% to 6.48%.

And average five-year fixed mortgage rates are also down by 0.18% points from 6.51% to 6.33%.

The predictions come after mortgage rates hit a 14-year high last month.

Mortgage rates rose substantially as the number of deals on the market nosedived following Kwasi Kwarteng’s mini-Budget in September.

The fall-out from the mini-Budget sent the pound plummeting against the dollar to a low of $1.03 on September 26.

And it led the Bank of England to warn that interest rates would rise to 6% next year.

But, in recent days the markets reacted positively to Rishi Sunak’s appointment as Prime Minister – bringing some stability to the mortgage markets.

Chancellor Jeremy Hunt will now deliver an Autumn Statement on November 17 – where he is expected to unleash spending cuts to plug a monster £40billion black hole in the public purse.

What does this mean for credit cards and loans?

The cost of borrowing through loans, credit cards and overdrafts could go up too, as banks are likely to pass on the increased rate.

However, as today’s announcement was unprecedented it’s unclear if this will happen.

Certain loans you already have like a personal loan or car financing will usually stay the same, as you’ve already agreed on the rate.

But rates for any future loan could be higher, and lenders could increase the rate on credit cards and overdrafts – although they must let you know beforehand.

You can cancel a credit card if you want and will have 60 days to pay off any outstanding balance.

The average interest rates on personal loans are already at their highest rate since October last year.

Individuals hoping to borrow Â£3,000 over the next three years face an average rate of 15.2%, compared to 14.3% this time last year, according to MoneyFacts.

The average rate across all types of credit cards including fees has hit a new high of 29.8%, according to MoneyFacts – up from 25% last October.

What does it mean for annuities?

Interest rate rises can also be good news for pensioners about to buy an annuity.

Annuity rates are linked to the cost of government borrowing and pay a guaranteed income for life.

The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long term financial security.

If you’re looking to buy an annuity, an interest rate rise can be very good news as it means you’ll probably get a better rate of return.

People who have already taken out an annuity can’t switch, but you can still benefit from better interest rates by putting the money from your annuity into a savings account with a better rate.

Tom Selby, head of retirement policy at AJBell said: “Annuity rates have increased by 40%-50% this year, meaning for many people they will be a consideration today in a way they probably haven’t been for the past decade or so.

“To give you an idea of what you can get for your money, a £100,000 fund might buy a healthy 65-year-old a single-life level annuity paying around £7,684 a year”

Will savings rates improve?

Savers could get some further relief as banks continue to battle it out by offering market-leading interest rates.

Historically banks don’t rush to up their savings rates in line with the base rate of interest – however, more and more are battling it out on the high street to offer the best rates.

A rate rise is generally good news for savers, especially after a long stretch of getting very low rates on their money.

Along with low rates, high inflation can erode away the value of any savings you have.

So if you have £100 in the bank this year and inflation is 10%, the real spending power of that money is reduced to £90 next year.

Another rate rise could see banks pass on higher rates to savers – though they are usually much slower to act than with passing on higher rates for borrowing.

This means savings rates are more likely to edge up slowly rather than change immediately.

Sarah Coles said: “For savers, any rate rise is unlikely to provide an overnight big bang where rates jump significantly.

“With the big high street banks stuffed full of lockdown savings, they’re happy to continue offering miserable rates – typically under half a per cent.

“It means it’s up to the smaller, newer and online banks to bump rates up.”

Anyone currently getting a low rate on easy access savings could find it’s worth looking around for a better rate after any rate rise and moving their money.

Right now, savers can get up to 2.81% in easy-access savings accounts and up to 5.1% in certain fixed bond accounts, according to MoneyFacts.

We’ve previously explained how to find the best savings rates.

What happens in a recession?

When a country recession when its economy shrinks over a sustained period of time.

It is calculated using something called Gross Domestic Product (GDP), which in the UK is the value of all the goods and services added up in pounds. 

Generally speaking, if the GDP has fallen over two quarters (or six months), a country is said to be in recession.

Job losses are a common symptom of recession, as companies try to cut their costs to stay afloat.

Businesses may also go into administration or go bust.

The 2008 recession, for example, saw the loss of high-street stores including music retailer Zavvi, clothes shop Principles, and stalwart Woolworths.



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