British Homeowners Brace as Talk Turns to BOE Rate Increase

Updated on
  • Survey finds households increasingly expect higher loan rates
  • High funding costs are putting pressure on mortgage lenders

Melissa Hellio, who borrowed almost 200,000 pounds ($252,000) to buy a three-bedroom house in Wales with her partner, says she is frightened at the prospect of rising interest rates.

“We’re at the mercy of the Bank of England,” said Hellio, 26, who paid 220,000 pounds for the end-of-terrace property in Cardiff with some financial help from her parents.

When BOE policy makers lowered their benchmark interest rate to a record-low 0.25 percent four months ago a further cut appeared probable but the precipitous decline in sterling since the Brexit vote has changed everything. 

As soaring import costs threaten to push inflation above their 2 percent target next year, officials are signaling there are limits to their tolerance. The majority of economists surveyed this month say the next move in rates will be up. While almost none see the BOE taking action anytime soon, households are less optimistic. A survey for the central bank in November found more than 40 percent predicted an increase within 12 months.

The fear of rising interest rates could weigh on consumer spending and the housing market at a time when wages are coming under growing pressure from the pickup in inflation. 

Financial conditions are already tightening, raising the prospect of dearer home loans even if the BOE does nothing. Sterling swap rates, used by banks to price mortgages, have been rising since September and are now at their highest since Britons voted to leave the European Union in June. 

“The fall in mortgage rates we’ve seen since the Brexit referendum is likely to be reversed over the next three months,” said Samuel Tombs, chief U.K economist at Pantheon Macroeconomics in London. “Markets have started to expect faster tightening in U.S. monetary policy and that’s pushed up expectations for U.K. rates.”

HSBC Holdings Plc recently scrapped its 0.99 percent two-year fixed rate mortgage because funding costs have risen in the last month. Its cheapest two-year fixed rate mortgage is now 1.29 percent and industry experts expect other lenders to follow.

“Fixed rates are going to start on an upward trajectory,” said David Hollingworth, a spokesman at broker London & Country Mortgages. “We’ve hit the rock bottom and more elevated funding costs will have to start feeding through.”

The pound has fallen 15 percent since the Brexit vote and official figures Tuesday showed annual inflation accelerated to 1.2 percent in November, the fastest pace in more than two years. In a sign of the shift in market sentiment, futures contracts are now pricing in a greater probability of a rate increase than a decrease from May 2017.

Stephen Boyle, 29, has protected against rising rates by borrowing less than he could have done for the 375,000-pound flat he shares with his wife in Greenwich, London.

“I don’t anticipate it happening within the next three years, but economic prediction is a mug’s game,” the business architect said. “The macro economy is fundamentally unpredictable in my view.”

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