The UK’s slow-motion house price crash will edge another step forwards as millions of fixed-rate mortgages expire over the next four years.
Homeowners face paying £2,900 a year extra on average as rates on new mortgage deals soar towards eight percent.
The coming week is crucial, with the latest official inflation figure published on Wednesday and the next interest rate decision due on Thursday.
In grim news, financial markets now expect inflation to remain sky-high at 8.5 percent in the year to May.
That is only slightly below April’s shock figure of 8.7 percent, which sent mortgage rates rocketing as it will force the Bank of England to drive base rates even higher for longer.
Everybody expects the BoE to hike rates for the 13th meeting in a row as part of its failed battle against inflation. The only question is how high it will go.
Some reckon rates will rise by 0.5 percent to five percent, although most still anticipate the usual 0.25 percent hike, which will lift bank rate to 4.75 percent.
That will only be a temporary respite as further increases will follow at future meetings, lifting bank rate as high as 5.75 percent or even six percent.
Core inflation, which excludes volatile food and energy prices, rose in April to 6.8 percent rather than falling as hoped. This piles yet more pressure on the under-fire BoE, said Chris Arcari, senior investment research consultant at risk consultants Hymans Robertson.
Unemployment is near historic lows at 3.8 percent while average earnings rose 7.2 percent in the three months to April.
This is worsening fears of a growing wage-price spiral and forcing the BoE to act, Arcari said.
UK headline inflation remains the highest in the G7 of advanced countries and will take longer to bring down, he added. “Central banks will err on the side of raising rates more and keeping policy tighter for longer, particularly given the large inflation overshoot and hit to their credibility over last year or so.”
A rate hike of 0.5 percent base rate increase cannot be ruled out after last week’s figure showed the UK economy grew 0.2 percent in April, said Nicholas Hyett, investment analyst at Wealth Club. “GDP growth, albeit modest, creates the space for the BoE to be more aggressive in its rate hikes.”
Gilt yields are now even higher than during the bond market shock triggered by former Chancellor Kwasi Kwarteng’s backfiring mini-Budget last September, said David Goebel, associate director of investment strategy at wealth manager Evelyn Partners. “Two-year gilt yields rose to 4.9 percent against a peak of 4.6 percent last autumn.”
With Chancellor Jeremy Hunt telling told BoE governor Andrew Bailey to “do what it takes” to get inflation down, markets are now pricing a peak UK rates of 5.7 percent, Goebel said. “Just a few weeks ago rate watchers were calling an imminent peak.”
All of this spells disastrous news for the trajectory of rate hikes.
Rocketing interest rates are causing “serious ructions” in the mortgage market, with lenders withdrawing products en masse and falling over each other to introduce new more expensive ones, he added.
The full impact of rising borrowing costs has so far been delayed because so many homeowners have locked into five-year deals. “Many more households and businesses could be in for a rates shock as reality suddenly feeds through.”
Over the next four years, some 7.5million homeowners will see their fixed rate mortgage deal expire and see payments rise by £2,900 a year on average.
Goebel said a 0.5 percent increase in the bank rate on Thursday “is not unthinkable”. “Much now depends on the inflation reading the day before.”
The UK has so far avoided a recession, partly due to stronger-than-expected services activity, but the housing market is vulnerable as mortgage rates rise and further hikes will cause more damage.
Last week, the US Federal Reserve held its funds rate at 5.25 percent, the first pause since it started hiking in March 2022, but warned of further tightening to come.
The European Central Bank lifted its main refinancing rate by 25 basis points to four percent last week, with further hikes expected as underlying price and wage pressures remain strong.
Marcus Brookes, chief investment officer at Quilter Investors, said the BoE “has to walk a tight rope between getting inflation under control and avoiding pushing the UK into recession amid strong economic headwinds”.
That would be a hard trick to pull off at any point. Given that the BoE has called inflation wrong again and again, homeowners have good reason to be worried.