Matthew Wyles, group development director at The Mortgage Works, commented: “This rate increase comes at a time when insolvencies have already started rising. As sure as night follows day, we will see more borrowers getting into difficulties which, over time, will lead to a further expansion of the impaired credit mortgage market.
“We expect the buy-to-let sector to continue to grow despite rising rates. Although some highly geared property investors will feel the pinch, there are also many who are sitting on a lot of equity including those earning big City bonuses. Foreign investors, particularly from emerging markets, see London as their first choice, because the capital is clearly emerging as the World’s pre-eminent financial and cultural city – and that’s before the Olympic effect. This rate rise will probably drive the value of sterling up further which will reinforce the appeal of sterling denominated investments - especially UK property. Global demand for London property will create the ripple effect, pushing up prices anywhere remotely within striking distance of the metropolis.
“The expansion in the buy-to-let market is making it inevitable that most prospective first-time buyers will continue to rent as they watch prices spiralling away from them. The bad news for these people is that some landlords will try to pass on the cost of rising interest rates to their tenants as their leases come up for renewal.”
BSA’s director-general Adrian Coles, said: “Consumers should not panic as a consequence of this rise, but should try to assess how it will affect their finances. For people on variable rate mortgages, the increase in the interest rate will see their mortgage payments rise.
“For some, especially people who have also taken out personal loans or credit cards, this could mean a problem paying the mortgage.
“If this is the case then they need to contact their building society as a matter of urgency. When they do, they will find a sympathetic response and help to get their finances sorted. This could include rescheduling their repayments. Talking to your building society is particularly important as further rate rises are still a possibility.
“Not paying your mortgage can put your home at risk. Building societies want to avoid this if at all possible.
“For the 55% of building society mortgage holders who have a fixed rate product, the rate rise will make little immediate difference.”
Stephen Leonard, director of mortgages at Alliance & Leicester, said: "A rise was expected this month to curb the effect of high inflation rates previously reported by the Bank of England. The mortgage market has already factored in a potential rate rise in anticipation of today's announcement, and is still reporting strong growth, so any knock-on effect should be minimal.
"House price inflation is significantly down on last year, and the market is currently experiencing a cooling effect, as increased inflation, higher borrowing costs and the possible introduction of HIPs are all leading to consumers tightening their belts, taking stock of their finances and perhaps delaying their decision to buy or sell a property.
"However, indications are that the rate may well be at the top end of the curve so borrowers needn't panic. As the effect of lower energy prices comes into play and inflationary pressures are likely to slow towards the second half of the year, this could lead to rates falling back again.
"First-time buyers should consider locking into a fixed-rate mortgage enabling them to have the security of regular payments, and allowing them to budget at a level they find comfortable and affordable. There are still deals on the market under 5.5%, and borrowers should act quickly if they want one.
"Competition in the buy-to-let market is intense – consequently there are some good value rates available. With the rate rise, landlords will have to consider either charging the tenant more, or increasing the level of deposit they put down on a property in order to make the economics work for them."
Ray Boulger of John Charcol, commented: “Today’s 0.25% increase in Bank Rate was so widely expected that any other decision would have been a major shock and would therefore have indicated that the MPC had received some significantly different economic information to that currently in the public domain. Forecasting Bank Rate decisions in the months when the Quarterly Inflation Report is published always has the additional problem that the MPC has access to most or all of that report before making their decision, whereas it is not made publicly available until six days after the MPC’s decision.
“The forecast in February’s Inflation Report was that the Consumer Price Index (CPI) would fall back to around the target level of 2% by the end of this year, assuming that Bank Rate increased to 5.5% as anticipated by the market and that it would peak in this cycle at that level. The fact that the MPC considered a move to a 5.5% Bank Rate was appropriate for meeting their CPI targeting objectives, after having sight of this month’s Quarterly Inflation Report, and probably also at least a strong indication of last month’s CPI figure (which is likely to have retreated below 3%), suggests that the May Quarterly Inflation Report will not diverge significantly from February’s.
“The key question now is whether 5.5% will indeed prove to be the peak. The publication next Wednesday of the Quarterly Inflation Report will provide the best guide on this and so it seems sensible to hold off on drawing too many conclusions until then. However, there are increasing signs that last three Bank Rate increases are impacting on the housing market and in particular the number of new mortgage approvals for purchases has fallen over the last few months. The actual amount of lending has increased but this simply reflects higher loan sizes as a result of the 10% or so increase in prices on an annual basis. One needs to treat housing market statistics with caution over the next few months because of distortions caused by the planned introduction of Home Information Packs (HIPs) on 1 June.”
