Bank of England locks in interest rates as new homeowners pay extra £3,480 a year

The Bank of England decided today (May 9) to keep the base rate of interest at a 16-year high of 5.25 per cent, in order to bring inflation down to the government target of 2%. But for first-time buyers and new homeowners, this has effectively locked in an extra £290 per month on top of mortgage payments.

With inflation down to 3.2%, some had hoped rates would be cut this month, but "sticky inflation" in the United States had left the Bank of England's monetary policy committee hesitant to start lowering the base rate of interest. However, Governor Andrew Bailey said he was "optimistic that things are moving in the right direction," with a nod to rapid cuts possible later in the summer.

But following half a year of high interest rates, the cost to borrowers of loans and mortgages has ballooned, increasing the number of home repossessions due to debt defaults in the UK by 36% in just the first quarter of 2024. With data showing many homeowners paying an extra £3480 per year to keep up with their mortgage due to the high rate of interest, today's announcement by the central bank will have done little to ease the worries of mortgage holders.

READ MORE: Bad news for mortgage and rent costs after Bank of England decision

Research from broker Mojo Mortgages shared with IFA Magazine reveals that in April 2022, the average mortgage rate for a first-time buyer was 2.68%. For a property that costs £250,000 with a 10% deposit and a 30-year loan term, the monthly cost would be £910.

However, the same property (£250,000 with a 10% deposit) would now cost an average of £1,200 per month due to an average mortgage rate of 4.95%.

This represents an increase of £290 per month, which equates to:

• £3,480 extra over a year

• £6,960 extra over a two-year fixed-rate mortgage

• £10,440 extra over a three-year fixed-rate mortgage

• £17,400 extra over a five-year fixed-rate mortgage.

Mojo mortgage expert Claire Flynn said: “This may be unwelcome news to those currently saving a mortgage deposit. But there have been some reports of house prices falling due to rate rises impacting affordability. This may mean you can secure a property for a lower price than a few years ago.

“Remember though, house price trends can vary significantly in different parts of the country. Keep an eye on local selling prices for the property types you’re interested in to see what you may be able to afford.

“And if you’re struggling to save a deposit for your first home, there are a number of schemes that may be helpful. A mortgage broker, like ourselves, can help you investigate your options.”