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Interest rates to hit 5.75pc as banks pull record number of mortgages

house mortgages
house mortgages

Traders have reined in their interest rate expectations, with markets expecting the Bank Rate to peak at 5.75pc next spring.

This followed the Bank of England’s decision to launch an emergency programme of bond buying to stabilise financial markets.

Investors now expect the Bank Rate to rise to 5.75pc in March, not the 6pc or above projected before officials stepped in to prop up government bonds – known as “gilts”. Bank Rate is currently 2.25pc.

Samuel Tombs at Pantheon Macroeconomics, an analyst, said the Bank of England had shown it would not implement excessive rate rises.

“The decision to intervene in the gilt market reveals that the Bank of England does not intend to increase Bank Rate all the way to the 6pc level. Many households and businesses simply would not be able to keep up their monthly loan repayments, and pension funds could not meet their obligations, threatening financial stability,” he said.

This intervention by the Bank came after mortgage lenders pulled a record number of mortgage deals from sale on Tuesday and Wednesday, amid concerns at high street banks that interest rates will rise significantly in the coming months.

Moneyfacts, an analyst, said 935 deals were withdrawn by spooked lenders. This is more than double the previous record daily fall, which was 462 withdrawals on April 1 2020, during the first Covid lockdown.

On Wednesday TSB confirmed it was pulling six deals for both residential buyers and landlords with immediate effect and competitor Barclays said it would withdraw seven fixed deals for new borrowers overnight. The latter was not able to confirm when these mortgages might return to the market.

Since last Friday, when Chancellor Kwasi Kwarteng unveiled a package of tax cuts worth £45bn as he set out his plan to boost economic growth, 1,300 deals have been removed from the market, according to Moneyfacts.

The Bank of England has moved to calm the markets, but is still expected to raise rates when its Monetary Policy Committee meets on November 3.

Experts warned rate-setters could be forced to act sooner if the economic situation worsened. If the Bank Rate were to rise to 3pc in the coming weeks, a buyer purchasing an average £295,750 property with a 25pc deposit on a two-year deal would see their monthly mortgage payments jump from £1,188 to £1,283 – an overnight rise of almost £100 a month, according to analysis by estate agency Hamptons.

Mr Tombs said if Bank Rate were to rise above 4pc many households would be unable to afford their mortgages.

“While increasing Bank Rate less quickly than investors currently expect will put more downward pressure on sterling, even a 4pc level of Bank Rate will lead to a big enough rise in interest payments and reduction in new borrowing to generate a recession, which will crush domestically-generated inflation.”