Experts warn that mortgage holders could be paying hundreds of pounds more each year if the Bank of England raises interest rates.
Brokers said that homeowners should be prepared for sharp rises in the future, if the top economists raise rates further over the next two-years.
They added Britons are likely to also be hit by rising energy costs, food prices and rocketing National Insurance payments.
Meanwhile savers were also disappointed by the move but were told there were still ways to make some cash on their nest eggs.
The best ways to make sure you’re still making money, despite all the changes are to switch to the best savings deals and to buy bank shares.
Markets were shocked when the Bank of England raised interest rates to an historic high amid concerns that inflation will rise.
Governor Andrew Bailey increased this level from 0.1% to 0.25 Percent after headline CPI inflation was at 5.1% yesterday. It is the highest in 10 years.
Brokers said that homeowners should be prepared for sharp rises in the future, if the top economists raise rates further over the next two-years. Photographed by The Bank of England
The Britons could also be affected by higher energy costs and food prices (file photo).
Experts warn that the rise will cause havoc in the housing market, and mortgage holders could be subject to severe squeezes.
UK Finance predicted the 850,000 mortgage borrowers on tracker rate deals will face paying an extra £15.54 per month.
But the 1.1million in the country on standard variable rate mortgages will see a leap of just £9.58.
Martijn van de Heijden (CFO of Habito mortgage broker) stated: “Even though an increase in the base rate to 0.25 percent sounds minor, 25% of UK mortgage holders on variable, tracker, or standard rate mortgages will notice this impact their monthly statements moving forward.
“This could lead to their monthly repayments increasing by hundreds of pounds per year. This could not be the first of many hikes.
“Economists already predicted a second increase to 0.5% in Spring 2022 and 1% by the End of 2022.
“The Office of Budget Responsibility has projected that interest rates would reach 3.5% in 2023,” said OBR.
“This may indicate that the end of an era of low interest rates could be near.
Because it’s something that many homeowners have never seen, it will be a shock for them.
If you have bought a house within the past twelve years, then you’ve only needed a mortgage when the base rate was one per cent.
Mr van der Heijden went on: ‘The concern is that if the Bank does need to raise rates several times over the next 12-24 months, when homeowners do come to remortgage, prices could be much higher than where they are now.
This rate rise is expected as households’ finances are likely to be affected by higher energy and food prices within the next few weeks and an increase in National Insurance Payments for next year.
“The OBR already stated that the OBR will hold real household incomes at 2019 levels for two more years.”
According to him, homeowners with expired deals in the next six-months could repair their mortgage costs and protect themselves.
He added: ‘But for anyone with deals expiring mid-2022 and beyond, there is an expensive watch out; Early Repayment Charges.
These fees are determined by the lender and may be several thousand of pounds. Many homeowners now have to consider whether the exit fees for early remortgages are worth it.
After yesterday’s headline CPI figure of 5.1%, governor Andrew Bailey and top government officials were under immense pressure to move after it was revealed that this is far higher than expected and has been the highest since a decade.
Governor Andrew Bailey, and other top officials raised the level to 0.25 percent
Peter Kimpton of Family Money is a Personal Finance Expert and said that the changes weren’t the Christmas gift homeowners were looking for.
“Unfortunately, once inflation surges are always inevitable. But for people with interest-linked mortgages this wasn’t the Christmas gift they wanted.
“This is only the second price rise in December for the Bank of England. This happens because it doesn’t make financial sense to give bad news just before Christmas to the entire nation.
“That will of course not make it easier for average UK families to swallow, particularly when you consider existing worries about rising costs, stagnating wages, and the economic effects of the pandemic.
“Today’s news is very troubling for many people, including those in the retail sector. They will wonder if people will tighten their purse strings at the exact time of year when we expect people to spend more.
And Head of Corporate Partnerships at Sirius Property Finance Kimberley Gates added: ‘Any increase in interest rates is always going to cause concern from homeowners who will be understandably worried about the implications it might have on their monthly mortgage payments.
“However, you should remember that rates are still extremely low even today and there is no need to flee the country.
The nation’s homebuyers can easily handle any price increase. Many others will be able to lock in fixed rates that they will continue receiving.
“While lenders will likely react to today’s rise, it is unlikely that this will dampen homeownership’s appetite. Buyers will still be able to take advantage of some of the most affordable rates in recent history.
Santander, the bank which announced the increase in its customer base was first to do so within seconds of the announcement, was followed by NatWest and Nationwide. It was followed by NatWest and Nationwide.
Although the rate rise is the first since 2018, it is still below the Credit Crunch’s historic lows.
Yesterday’s CPI inflation numbers were substantially higher than expected
Savers were also left disappointed they would not be seeing a a substantial jump in the rates paid by easy-access and fixed-rate accounts or cash Isas.
However, experts gave them the silver lining that they still had options to earn money.
The Isa would allow them to transfer their funds from high-street banks to Isa deals. This was a great way to increase their financial stability.
A risky investment in stocks could be another way of protecting their funds.
One expert said the best on the London Stock Exchange at the moment to invest in was Barclays while another said Lloyds was a safe bet.
And a third way to keep making cash was to buy shares in cash rich companies such as InterContinental Hotels because they are insulated from a rise in borrowing costs.
The Monetary Policy Committee voted by 8-1 for the first interests rate hike it has implemented since 2018, meaning borrowing is likely to get more expensive for some mortgage-holders.
The Bank predicted inflation would rise to around 5% by spring. However, the Bank now admits that prices could increase up to triple its 2 percent goal for April.
Some economists have been urging the MPC to start increasing interest rates to help prevent an inflationary spiral, but the Bank had been widely expected to wait until the impact of the Omicron strain is clearer.
As sterling was more attractive to investors, the British pound rallied against the US dollars after the announcement.
The FTSE 100 also rose marginally in the wake of the news on interest rates
According to the Bank’s minutes, it downgraded its fourth-quarter growth outlook from 1 percent in the prior forecast.
According to it, “Most of the Committee deemed that an immediate small increase in the Bank Rate was necessary.”
“The uncertainty surrounding Covid development made this decision at the meeting a delicately balanced one.
“It was worth waiting to learn more about the likelihood that Omicron would escape current vaccine protections, and the economic impact of the new wave.
“There were, however, strong arguments for tightening the monetary policy now given current inflationary pressures. This is to preserve price stability over the medium-term.
This move follows a US Federal Reserve announcement that it will accelerate its credit tightening in the wake of inflation hitting a 40 year high in November.
After the announcement Sterling surged higher, quickly rising by 1.1 percent against the US Dollar to 1.336 and 0.7% against the Euro at 1.181. The FTSE 100 index also saw a slight increase.
Since March 2001, the UK base rate has been at 0.1%. This was when the Bank took measures to stabilize the economy before the outbreak.
It is only the third increase in rates since September 2018 and the first since the financial crises.
More food for thought was provided to the Bank by a closely followed index suggesting that growth has fallen to a 10-month low.
IHS Markit/CIPS Flash UK Composite PMI had a reading at 53.2. Anything higher than 50 indicates growth.
It compares to November’s 57.6 reading, which would have been the lowest score since February.
An earlier warning by the International Monetary Fund this week was that the Bank shouldn’t delay efforts to stem the rise in costs.
Rising prices have been piling pressure on the Bank to raise rates – hitting borrowers – but a hike could derail the UK’s fragile economic recovery from Covid.
If inflation rises above the target of 2 percent, then the Bank typically raises its base rate. The Bank raises the base rate to encourage households and companies to save instead of spending, which keeps prices down.
However, Omicron Covid fears are keeping Christmas revellers and workers at home. There is concern that a hike might halt or reverse the recovery.
According to the MPC, the global GDP level in the fourth quarter 2021 will still be the same as last month’s projection. However, consumer price inflation has ‘risen more than anticipated’.
It added that the Omicron variant of coronavirus – which has spread rapidly over the past month – poses downside pressure on economic activity at the start of next year.
Officials at the Bank stated that they had also reduced their expectations of the UK’s GDP levels in the fourth quarter by 0.5% from the last Bank meeting. This leaves GDP approximately 1.5% lower than its pre-Covid level.
According to the report, “Growth in many areas has been hampered by disruptions in supply chains as well as labour shortages,”
“The Omicron variation, the associated measures by the UK Government or Devolved Administrations, as well as voluntary social distancing, will have a negative impact on the GDP in December and 2022 Q1.
Suren Thiru of British Chambers of Commerce was head of economics and said this step was “surprising” given the recent rise in Covid cases.
He said that ‘The Bank of England’s surprise decision to increase interest rates was surprising considering mounting uncertainty about the economic effects of the Omicron variation’.
‘While today’s rate increase may have little effect on most firms, many will view this as the first step in a longer policy movement – not as a partial reversal of last year’s cut.
The policymakers must make a delicate choice between a surging inflation rate and a stagnant recovery. With the current surge in global inflation driven primarily by global factors raising inflation, increased interest rates won’t be enough to stop it from rising further.
“It is crucial that both the Supply Chain Advisory Group of the Government and the Industry Taskforce provide practical solutions for the labour and supply shortages which continue to fuel inflationary pressures.
“Further, unless there is a real improvement to the current situation, supply chains that are currently experiencing rising prices will continue to face a challenge even with monetary policy interventions.”
Hargreaves Lansdown’s senior investment and market analyst Susannah Streeter said that “The Bank of England has put out an anchor to stop the rapid currents of inflation leading the economy into even more dangerous waters.”
“The rise in interest rates to 0.25 percent, which raises the cost of borrowing costs, is intended to dampen down demand. It also risks sending already fragile sectors off track.
“Policy makers see rampant inflation to be an even greater threat, as the CPI readings this week show that prices have already been accelerating at levels unpredicted until next spring.
“They are not waiting to see the covid storm pass, but they are taking steps now to avoid a steeper upward spiral of prices.”
This morning, the Bank had more to think about as an closely-followed indicator suggested that growth was at a 10-month low.
Experts were split on how to proceed with the Bank’s decision before it was made.
Julian Jessop of Institute of Economic Affairs said that the Bank’s credibility is at risk if it fails to take action now to curb inflation expectations.
He said that Omicron is more likely to increase inflation pressures through further disruption of supply chains than it is to lower them by dampening the demand.
Yael Selfin (chief economist, KPMG) said, “We expect the Bank of England will adopt a wait–and-see approach to this week’s meeting. It allows for more time in order to assess the net effect of the Omicron variation on growth and inflation.
Ms. Selfin predicted that inflation would rise once again in December and reach a peak of over 6 percent in spring.
“The recent setbacks in the development of the pandemic may put further strain on supply chain, with inflation forecast to hit just under 6 percent in April. She said that continued supply disruptions during the Christmas season, combined with worsening delivery times from suppliers, could lead to inflation reaching 5.6% in December.
According to the Office for National Statistics, November’s inflation rate was most affected by transport. The price of petrol and secondhand cars rose, while fuel prices rose. In November, the average petrol price reached 145.8p per gallon. This is an increase of 112.6p in a previous year.
Due to a lack of new electronic chips, used cars are now more expensive than ever.
As families started Christmas shopping, the prices of toys, games, and other hobby items rose. Inflation in food, clothing, and household goods was also much higher than usual.
After the IMF predicted that UK inflation would reach 5.5% in spring (the highest level since the 1990s), the ONS released the figures.
Many could find it difficult to manage their budgets due to the rise, so the IMF cautioned the Bank of England not to ‘inaction’.
Kevin Brown, a savings specialist for Scottish Friendly, stated that the cost of living continues to rise faster than predicted by most economists and the Bank of England.
“Inflation in Britain is poised to hit its highest point in 30 years by 2022, but Omicron’s looming threat means that it is unlikely the Bank will raise interest rates today to further destabilize the economy and household finances. The Bank may face a difficult task to control inflation when the February rate hike is completed.
“The Bank’s inaction means that households are now taking action to reduce the cost of living.
According to Mr Brown, Scottish Friendly research showed that over one third of families are ‘nervous they won’t be able to pay essentials this winter.