New analysis from Capital Economics has found that the average interest rate that households are paying - including households without mortgages - has barely budged since the Bank’s latest rate-hiking cycle began at the end of 2021.
Even though the Bank Rate has soared from near zero to 4.5 percent, the average household interest rate has increased by only 0.35 percentage points to 2.8 percent.
An increase in the Bank Rate always takes time to filter through to households. But Capital says this cycle has been different to previous ones, as a model based on past rate rises predicts that the average household interest rate would have risen to around 4.5 percent.
Some of that is due to the increased prevalence of fixed-rate mortgages. But Capital’s chief UK economist Paul Dales said that alone does not explain the difference.
“We always knew that the shift from variable rate mortgages to fixed rate mortgage since the Global Financial Crisis would mean that actual interest rates would rise slower than our model,” Dales said. “Even so, we have been surprised how little the effective interest rate has risen so far.”
Dales said the rate rises will still catch up to households; it’s just talking longer than it has before.
“Higher interest rates will soon bite harder,” he said. “Forecasters just need to wait for the effects to show up.”
Lenders across the market have repriced or withdrawn their mortgage products in recent weeks, after higher-than-expected inflation led to fears of more rate hikes. The average two-year fixed mortgage rate was 5.82% as of Thursday, but only around a third of mortgage-holders pay more than 3 percent at the moment.
When the ‘mortgage time bomb’ of expiring fixes goes off, that will all change.
The model predicts that the average household interest rate will peak at around 5.5 percent, based on the Bank hiking rates to 5.25 percent. If that’s the case, which would mean the average household’s interest payments would almost double.
Similarly, Dales said most of the impact of rate hikes on the UK’s GDP was still to come. He said that between 30 percent and 40 percent of the impact had come though, but close to two thirds of the impact could be on the way.
“That’s why we still think there will be a recession in the second half of this year,” he said.