Mortgage bombshell for 300,000 Scots households as interest rates rise

It is the 12th time in a row that policymakers at the Bank have raised rates, making it even more expensive to borrow and pushing banks to lift savings rates.

The central bank has been increasing interest rates since December, 2021 to try and control inflation, which currently stands at over 10%, the highest in 40 years.

The Bank of England said that inflation was at a higher than expected level but was expected to reach as low as 5.1% by the final quarter of this year with energy prices expected to fall.   

It said that typical household energy bills are expected to drop to around £2100-a-year by the fourth quarter of the year.  That is only £400 less than the energy price guarantee cap brought in by the UK Government.

The Bank’s aim in elevating interest rates is to bring UK inflation down to its 2 per cent target.

In February, when the last report was produced, the Bank said it expected interest rates to fall sharply over the rest of the year.

Worst hit will be the estimated 115,000 Scottish households on standard variable rate (SVR) mortgages and the 85,000 on tracker loans, which fluctuate with the Bank of England rate.

Repayments had already increased by hundreds of pounds per year since the base rate rises began in December, 2021.

READ MORE: Ferguson Marine: Union calls for halt to denationalisation

But is estimated that a further 120,000 households in Scotland whose fixed rate mortgages are set to expire this year are also set to be hit.

They are among the 1.4m across the UK whose fixed-rate offers are due to end, with 57% of these types of loans at interest rates below 2%, according to official analysis based on Bank of England data.

Some 100,000 fixed-rate mortgage deals were scheduled to end during 2022 in Scotland.

The latest increase has come after a series of speeches from central bank policymakers arguing in favour of higher borrowing costs to bring inflation - which charts rising prices - to more sustainable levels.

Inflation stood at 10.1% in the year to March, down slightly from 10.4% in February - in part due to food prices rising at their fastest rate for 45 years.

According to analysis supported by interest rate data tracked by analysts Moneyfacts the typical Scots household with a 25-year term standard variable rate (SVR) repayment mortgage with £100,000 of debt remaining will see £390 added to total annual repayments as a direct result of the 0.25% base rate rise. Those Scots on a two-year tracker with the same amount of repayment mortgage debt would see a £350 hike.

The governor of the Bank of England Andrew Bailey said: "Let me be clear inflation remains too high and it's our job to get it all the way down to 2% target and have it stay there."

Six months ago the Bank of England was expecting the longest recession on record.

But now Mr Bailey says there will now be “modest but positive growth”.

Rachel Springall, finance expert at Moneyfacts said: “The latest base rate rise will be disappointing news for borrowers who have been unable to refinance onto a fixed rate mortgage, yet another blow to their monthly outgoings amid a cost of living crisis.

“Inflated house prices and the relentless impact of the cost of living crisis will be taking its toll on borrowers, and there may be some concerned about whether this is the right time to take out a mortgage.

"Seeking advice is vital to ensure borrowers can comfortably afford to refinance based on their own individual circumstances. New buyers looking to get their foot onto the property ladder will still be facing a housing supply shortage and their deposits may not stretch far. These borrowers remain vital to keep the mortgage market moving, so hopefully more positive innovative changes will surface to support these buyers.”

READ MORE: Minister pledges to probe £1.6m bill for ferries that haven't sailed

An MPC meeting voted by a majority of 7–2 to increase Bank Rate by 0.25 percentage points, to 4.5%. Two members preferred to maintain Bank Rate at 4.25%.

The central bank said: "The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.

"The MPC will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit."

The increase in the cost of living is expected to fall slower than previously thought, the Bank of England warned, but it said the Government’s promise to halve inflation by the end of the year was still narrowly on track.

The Bank said it expects Consumer Prices Index (CPI) inflation to reach just over 5.1% by the final quarter of this year, which would mean that the Government only just manages to hit the target to bring inflation below 5.35%.

Meanwhile, economists at the Bank released a record upgrade to its gross domestic product (GDP) expectations.

The Bank said it now expects GDP to be 2.25 percentage points higher at the end of its three-year forecast period than it said in February. That is the largest upgrade since 1997 when the Monetary Policy Committee (MPC) was formed.

The SNP said "Scottish families are paying the price for Tory failure" - as interest rates rose.

SNP economy spokesperson Stewart Hosie MP said: The Tories and pro-Brexit Labour Party are making the cost of living worse by imposing cuts and a hard Brexit that's harming the economy.

"With interest rates rising, yet again, households across Scotland are being forced to foot the bill for this Tory mortgage premium, with payments increasing by hundreds of pounds.

"The UK government must deliver urgent support for struggling households - and prevent families falling into arrears through no fault of their own."

The Confederation of British Industry deputy chief economist Anna Leach said the Bank of England is “rightly concerned” that higher inflation could become “entrenched”.

“The MPC has again been driven to raise rates by stubbornly high inflation, ongoing strength in wage growth and better-than-expected activity. With inflation having been at or above 9% for a full year, the Bank are rightly concerned that higher inflation could become entrenched,” she said.

“The future path for interest rates is as yet uncertain. With ongoing bouts of banking sector turbulence in the US, risks to financial stability seem likely to persist as global interest rates continue to ratchet up and the full impact of past rises continues to feed through.

“While credit costs have so far adjusted smoothly, further material turbulence could yet disrupt activity, requiring a looser monetary stance. On the other hand, inflation could surprise to the upside, particularly if wage rises remain elevated, suggesting further rate rises.”

Shadow chancellor Rachel Reeves repeated concerns that people will be “wracked with anxiety” after an expected rise in interest rates was confirmed.

“People will be wracked with anxiety by this news. The (Prime Minister) must admit his responsibility for the Tory mortgage penalty leaving so many worse off,” Ms Reeves said.

“We need a proper windfall tax on oil and gas giants now to ease the cost of living.”