Over 200,000 Scots homeowners face mortgage bombshell

·4-min read
Over 200,000 Scots homeowners face mortgage bombshell <i>(Image: Getty)</i>
Over 200,000 Scots homeowners face mortgage bombshell (Image: Getty)

SCOTS householders are bracing themselves for a huge hike in mortgage costs today as the Bank of England looks to bring inflation under control.

The Bank of England is contemplating the biggest interest rate rise in 33 years in a move expected to cost thousands of Scots households more than £200m a year in extra mortgage costs.

The cost of living is increasing at nearly its fastest rate in 40 years, driven largely by the rising cost of food and fossil fuels.

City investors expect interest rates to rise by at least 0.5 percentage points, or even 0.75 percentage points - taking them from 1.75% to 2.5% - today at the next meeting of its monetary policy committee (MPC).

A 0.75 percentage point rise would be the biggest since Black Wednesday, precisely 30 years ago last Friday, when the government increased borrowing cost by two percentage points in a failed attempt to avoid a collapse in sterling.

A 0.75% increase for a borrower with £250,000 of mortgage debt amounts to an extra £1,875 in annual interest payments, according to estimates by social investment network, eToro.

Increasing interest rates puts consumers and businesses off spending or borrowing, providing a greater incentive to save. As demand for goods and services fall, in theory, that should have an prevent costs from rising.

Investors are betting that interest rates will hit 3.75% by the end of the year as the Bank of England battles to contain inflation.

Today's announcement will be a concern for 200,000 Scots homeowners who in August faced mortgage bills rising by hundreds of pounds a year after the Bank of England hiked the interest rate for the sixth consecutive time.

Then, interest rates went from 1.25% to 1.75% in a bid to curb soaring prices with inflation predicted to peak at more than 13 per cent as gas prices soar.

It was the biggest single rise since 1995 and means interest rates are now at the highest level since January 2009.

Homeowners on Standard Variable Rates (SVRs) or tracker mortgages, which fluctuate with the Bank of England rate, will be hit the hardest by any new increase.

HeraldScotland: The number of mortgages handed out to first-time buyers and home movers fell by 16 per cent in February
HeraldScotland: The number of mortgages handed out to first-time buyers and home movers fell by 16 per cent in February

Industry estimates suggest around 200,000 Scots are on variable rate loans.

Repayments will have already increased by hundreds of pounds per year since the base rate rises began in December.

More than 100,000 fixed-rate mortgage deals which it is estimated are scheduled to end during 2022 in Scotland will also be hit.

Ben Laidler, global markets strategist at social investment network, eToro said “The Bank of England is highly likely to follow the lead of other global central banks when it meets by accelerating its hiking pace as it looks to get a grip on out of control inflation.

"We expect a rise of 0.75%, a seventh consecutive hike, which will take the base rate up to 2.5%.

“A rate hike of this magnitude will be another hammer blow for the millions of mortgage holders who are either on variable rates or who are watching the clock as their fixed rate deal nears its end.

"Mortgage rates have now doubled in the last year and there is little doubt that these shockwaves will soon shake the housing market. The small silver lining is that long-suffering savers will see a further boost to savings rates, even if these still dramatically lag inflation.

“We should also recognise that there is a good deal of uncertainty for the Bank of England at the moment, following the dramatic spending pledges of the new Truss government. The freezing of household energy bills will mechanistically cut inflation in the short term and soften the coming recession, but it will also stoke underlying inflation pressure."

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “For anyone who is already struggling with runaway price rises, the extra cost of the mortgage could be the final straw.

“While anyone with a fixed rate is currently protected, all these rate rises will be adding up and hit them in one fell swoop when it’s time to remortgage,” said Ms Coles. “If you have less than six months left to run on your mortgage deal, it makes sense to lock in a new fixed rate as soon as possible, ahead of potential rate rises.”

Prices in August were 9.9% higher than they were 12 months ago.

The Bank of England's governor Andrew Bailey has said "the Russia shock is now the largest contributor to UK inflation".

Economists agree that there are many factors, including energy bills, which have risen rapidly because of high oil and gas prices, food and petrol costs, and the price of used cars.

Bills will rise further in October, but not by as much as previously planned, as the government has brought in a cap to limit price rises to householders.

Some experts believe that Liz Truss's move to protect households from rising energy bills will add a jolt of stimulus to the economy, softening the downturn that analysts and the Bank of England had been expecting.