Rising inflation could push the base rate to 7.5 per cent

Commenting on news that rising inflation could push the Bank of England base rate to 7.5 per cent, Stuart Glendinning, managing director of moneysupermarket.com, said:

“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 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, this could be a real concern.

“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?

“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.

“Another worry is that such a marked rise in mortgage rates could depress the housing market. Arguably it would be no bad thing if house price inflation slowed but few would welcome a fall in prices if this were triggered. In fairness the shortage of housing supply probably makes this a remote risk.

“Research from moneysupermarket.com shows a quarter (25 per cent) of borrowers claim they are already struggling as a result of recent base rate rises, with 15 per cent claiming they’re feeling the financial stretch, nine per cent who’ve had to cut back on spending or get another job and one per cent who can’t cope and have had to sell their house or remortgage.

“Nearly two thirds (63 per cent) of borrowers say they would be forced to remortgage if their repayments increase again. While 14 per cent of borrowers would be pushed to remortgage if their monthly payments went up by up to £50, and a further 27 per cent would feel the pressure of payments rising from between £51 and £100.”