Over 200,000 Scots homeowners face mortgage bombshell

Interest rates went from 1.25% to 1.75% in a bid to curb soaring prices with inflation predicted to peak at more than 13 per cent as gas prices soar.

It is the biggest single rise since 1995 and means interest rates are now at the highest level since January 2009.

The Bank of England predicted the UK is to fall into its longest recession since the 2008 financial crisis.

The UK will enter five consecutive quarters of recession with gross domestic product falling as much as 2.1 per cent, the Bank said.

It blamed the slump largely on rising gas prices following Russia's invasion of Ukraine, warning a typical energy bill will hit £3,500 in October.

It means an average household paying almost £300 a month on energy bills.

In a gloomy economic prediction, the bank warned the sharp rise in energy bills, which are set to be three times more than a year ago, will drive inflation - the rate at which consumer prices rise - to 13%, its highest level for 42 years.

Derek Mitchell – the chief executive of Citizens Advice Scotland -called for “radical action” from government.

“Soaring inflation means higher prices in the shops and costs on bills for people already struggling badly with the cost-of-living crisis,” he said.

“That inflation is expected to stay high for much of 2023 and the looming prospect of a recession means this crisis isn’t going anywhere, risking a legacy of debt, poverty and destitution for years and years to come.

“Some of the most vulnerable people across the UK this winter will face a choice between freezing and starving.

“That’s the reality and we should not pretend otherwise. People are likely to die this winter because of this crisis unless we see urgent and radical action from policymakers.”

Homeowners on Standard Variable Rates (SVRs) or tracker mortgages, which fluctuate with the Bank of England rate, will be hit the hardest by the latest increase.

Industry estimates suggest around 200,000 Scots are on variable rate loans.

Repayments will have increased by hundreds of pounds per year since the base rate rises began in December.

More than 100,000 fixed-rate mortgage deals which it is estimated are scheduled to end during 2022 in Scotland will also be hit. 

Myles Fitt, a financial expert at Citizens Advice Scotland, said: "So many households in Scotland are struggling to make ends meet already.

"With energy bills, petrol costs and other payments higher than ever while wages stagnate, CABs are seeing increasing numbers of people who are just unable to cope.

"The rise in interest rates will hit such people hard, making it even harder for them to meet their daily living costs. Governments need to recognise the scale of the crisis and make more support available to those who are struggling."

According to fresh analysis by the financial information service Moneyfacts, the typical standard variable rate is now at 5.17%. For someone with a £200,000 mortgage, a rise of 0.50 per cent would add around £1,400 onto total repayments over two years.

It said that the average two-year fixed mortgage rate is now 3.95 per cent. In August 2020, it was just 2.08 per cent.

Similarly, the typical five-year fix has now surpassed the four per cent mark to reach 4.08 per cent - up from 2.34 per cent in August 2020.

Homeowners whose mortgages directly track the Bank of England base rate will see around £600-a-year added to their costs typically, according to industry calculations.

The £50.43-a-month increase was calculated by trade association UK Finance and is based on average mortgage balances.

The Bank's governor Andrew Bailey said he knew the cost of living squeeze was difficult for many people, but warned if high inflation lasted a long time that would make things "even worse".

"It will get worse precisely I'm afraid for those who are least well off in society.

"So while I have huge sympathy and huge understanding for those who are struggling most with this, and I know that they will feel, 'Well, why have you raised interest rates today, doesn't that make it worse from that perspective in terms of consumption?', I'm afraid my answer to that is, it doesn't because I'm afraid the alternative is even worse in terms of persistent inflation."

The dire economic conditions will see real household incomes drop for two years in a row, the first time this has happened since records began in the 1960s. They will drop by 1.5 per cent this year and 2.25 per cent next.

However, the recession will at least be shallower than the 2008 crash, with Gross Domestic Product (GDP) dropping up to 2.1% from its highest point.

Bank officials said the depth of the drop is more comparable to the recession in the early 1990s.

With the hospitality sector continuing to face a slow recovery from the pandemic and more recent challenges presented by the cost-of-living crisis and soaring energy and utilities costs, the Scottish Licensed Trade Association (SLTA) has warned that today’s interest rate increase to 1.75% could be too much for some smaller businesses to bear.

Colin Wilkinson, SLTA managing director, said: “The last thing businesses need just now is for the Bank of England to increase the interest rate to its highest level since December 2008.

"Businesses have been feeling the squeeze since the pandemic hit two-and-a-half years ago and are already grappling with paying off debts incurred during Covid. This could be the final straw.

“Many businesses have also incurred extra costs in finding staff who left the hospitality industry during the pandemic and because of Brexit, while those beginning to find their groove again over the summer have seen their efforts thwarted by ongoing train strikes.

“At a time when the Scottish hospitality industry should be upbeat with the festival season under way and warm, sunny weather encouraging people to get out and about again, the mood is decidedly downbeat as business owners speculate over what the next barriers to recovery will be.”

Mr Wilkinson called on the next Prime Minister to adopt a “business first” agenda to adopt a “sharp focus” on the economy in order to protect businesses and jobs, and stimulate economic growth.

Anas Sarwar, Scottish Labour leader, named the rise a “national emergency”, adding: “People are already struggling and it’s going to get worse. The response from our governments must match the scale of the crisis.”

Brian Sloan, chief executive at Age Scotland, said older people, particularly those on fixed low and modest incomes, face even tougher times through the interest rate rise.

"The pause to the triple-lock on pensions last year has had a considerable impact on the lives of hundreds of thousands of pensioners in Scotland and set a dangerous precedent for future pensioners. The following, smaller, rise in the state pension from April fell well short of the soaring cost of living at the time and that gulf has been growing every month since.

"We have real fears that soaring inflation and interest rate rises will mean even more older and vulnerable people are plunged into poverty or financial hardship unless they receive substantial support. For those who have been using credit and store cards to spread the cost of daily necessities, their repayments could now jump and find themselves in real difficulty balancing their household budgets."