Mortgage holders are bracing for a “painful rise” in payments after the Bank of England tightened monetary policy for the first time since mid-2023.

The Bank’s Monetary Policy Committee raised interest rates to four per cent in a bid to stop inflation spiralling out of control amid the ongoing conflict in the Middle East. 

But the decision will cause a further squeeze on home owners, who are already struggling against rising bills, as higher borrowing drives up mortgage costs.

Around 2.3m households are due to come off fixed rate deals by the end of 2027, and could face higher bills when it comes to remortgaging. 

The majority of borrowers secured deals during periods of low rates, meaning they could see monthly repayments rise by hundreds of pounds.

Polling from / Freshwater Strategy, found 29 per cent of people believed they would be unable to afford the rise in bills off the back of the rise in mortgage bills.

According to Moneyfacts, the average two-year fixed mortgage rate stood at 5.87 per cent at the beginning of November. The average five-year fix was at six per cent.

Fixed mortgage rates are largely influenced by financial markets’ expectations of future interest rates and don’t reflect immediate shifts in the base rate. But the hawkish split of Monetary Policy Committee members, who all voted for a hike, may push fixed rates up as lenders price in the prospect of a higher rate regime.

“For mortgage holders, today’s decision will add to the pressure on household finances, particularly…those approaching the end of a fixed rate deal,” said Alexandra Loydon, group advice director at St James’s Place.

“With household budgets already stretched, even a small increase in monthly repayments could add to financial pressures.”

Tracker mortgage woes

The small number of households that are on tracker mortgages can expect a near-immediate rise in repayments. The products follow the fluctuation of the Bank’s central rate.

Tracker mortgage holders can expect a £30.72 monthly increase to their mortgage repayments, according to UK Finance.

Financial advisers said that while the sharp rise can be painful in the short term, those willing to hold on until rates come down again could secure a better deal in the long run.

Samuel Mather Holgate, managing director of advice firm Mather & Murray Financial, said: “For borrowers who can tolerate some uncertainty, a tracker mortgage could prove considerably better value, particularly if inflation pressures ease.”

But, David Hollingworth, associate director of L&C Mortgages, said there is “no guarantee that rates don’t keep on climbing”, warning people to only take on a tracker mortgage if they can handle the financial uncertainty.

Variable deals

Meanwhile, those on a standard variable rate (SVR), where the rate is set at the discretion of the lender, could also face higher repayments.

John Fraser-Tucker, head of mortgages at Mojo Mortgages, warned that letting your mortgage roll onto a SVR could “easily be the most expensive mistake a borrower could make right now”.

Roughly, 470,000 deals are on SVR, and if a lender decides to pass on the 0.25 percentage point increase in full, the average homeowner will see their monthly repayments increase by £14.28.

“The rate rise is likely to mean people with variable rate mortgages see another painful rise in their outgoings, so will need to find savings elsewhere,” said Sarah Coles, head of personal finance at AJ Bell.

“This is easier said than done, because prices have already been climbing, particularly at the pumps, and life is set to get harder in January, when a horrible hike in energy prices turns the screw on people’s budgets.”