Interest rates UK: Home owners on tracker mortgages set to pay £324 more a month than when Liz Truss launched mini-Budget

Home owners on tracker mortgages can expect to be paying an average of £324 more a month on their loan than a year ago if, as expected, the Bank of England (BoE) raises interest rates next week.

The BoE is widely expected to increase its base rate by 0.25 percentage points to 5.5 per cent when it meets on Thursday. It would be the 15th consecutive rise since interest rates started going up in December 2021.

Households on tracker and standard variable rate (SVR) mortgages, many of whom are trapped with their existing deals, will feel an immediate impact following the Bank’s decision.

If the base rate does increase to 5.5 per cent, the average tracker mortgage will go up by £26.22 a month, while the average SVR mortgage will rise by £14.53 a month, according to data from UK Finance.

The UK economy shrank by 0.5 per cent in July, prompting more recession fears. Picture: Getty Images

It suggests the average interest rate on a tracker mortgage is likely to hit 6.45 per cent in this scenario, meaning the average monthly interest payment on a tracker mortgage will go up to £676.47 a month, compared to £352.76 a month this time last year.

Meanwhile, the average monthly interest payment on a SVR is likely to hit 7.75 per cent, meaning the average monthly interest payment on a SVR will go up to £450 a month, compared £312 a month this time last year.

The projections mean the average tracker mortgage holder will be paying an extra £3,884.52 and the average SVR mortgage will cost an additional £1,656 compared with this time last year.

The average interest payment on an SVR mortgage is lower than a tracker mortgage because the average amount borrowed by SVR mortgage holders is lower than the average amount borrowed by those with tracker mortgages.

The latest potential rate rise from the BoE comes days before the one-year anniversary of Liz Truss’s disastrous mini-Budget, which threw the mortgage market into turmoil.

Mortgage rates were already increasing before Ms Truss’s short tenure as prime minister. However, the mini-Budget caused rates to shoot up and some analysts believe that it contributed to the length and severity of Britain’s economic crisis.

Most of the 8.4 million households with mortgages are on fixed-rate deals and will escape the impact of interest rate rises until their current terms end, when their monthly payments are likely to rise by hundreds of pounds a month.

According to UK Finance, 643,000 households have tracker mortgages, while 679,000 households on SVR ortgage deals.

Myron Jobson, senior personal finance analyst at Interactive Investor, said next week’s potential rate rise will be “particularly painful for those with a tracker mortgage deal”.

“This cohort has seen their monthly repayments balloon by hundreds of pounds over a short period,” he said. “The worry is the fresh increase in the base rate will lay waste to stretched budgets, leading to financial stress and potential risk of default if they can’t manage their increased housing cost.”

However, another rise in interest rates is not guaranteed, with some speculating on whether there will be a pause next week before a restart at the next meeting.

James Smith and James Knightley, at Dutch bank ING, said of a possible pause: “We certainly don’t rule that out, and recent comments suggest the BoE is laying the ground for the end of this tightening cycle.”