The Bank of England has raised interest rates for the 10th consecutive time as it battles inflation - a move likely to hit thousands of investors with variable rate mortgages and those forced to renew fixed-rate deals.

The base rate has gone up by half a percent to 4%, the highest since autumn 2008, as the Bank failed to apply a smaller increase in response to the weakening UK housing market.

Yesterday, Nationwide reported that house prices have fallen for the fifth month in a row, with the average property now worth �258,297, almost �4,000 less than in December.

Rates raised

The Bank has been raising rates successively for more than a year. In December 2021 the base rate stood at just 0.1% as policymakers tried to encourage consumer spending after Covid slowed the economy.

It is now hoped that the peak in interest rates is imminent. In its latest assessment of the economy, the Bank says the UK is set to enter recession this year but that this will be shorter than previously thought. It expects the economy to fall slightly in 2023 as energy costs and other prices continue to ease.

Landlords with interest-only loans face a restricted choice when refinancing because rental income, even with rent rises, might no longer meet the lender's required interest coverage.

A recent survey of 1,001 landlords by bridging loan broker, Finbri, found that 52% of landlords are looking to increase rents if the base rate increases to 4.5%.

Nathan Emerson, CEO of Propertymark, says despite the challenge of higher mortgage payments, due to the demand for homes continuing to outweigh the number of available properties, this is fuelling a more stable market.

He adds: 'With banks stress testing people's finances for many years, arrears and repossessions aren't drastically increasing and we are therefore seeing a levelling out of the market and a return to more normal levels of housing transactions.'�

Reaction

Samuel Mather-Holgate of Mathew and Murray Financial

"It's no surprise the Bank of England pursued this ridiculous policy. They are inflicting pain on a population reeling from higher taxes, sky high inflation and already high rates," he says.

"Inflation will fall off once the energy figures have been in the numbers for a year, so will be back to target in a few months. It's absurd that they are hiking rates only to slash them again in a few months' time.

"The consequences of this will be felt by the most vulnerable the hardest. A blinkered decision by the Bank."

Simon Gammon, Managing Partner at Knight Frank Finance, he says:

"Today's hike was baked into fixed rate mortgages, so we don't expect much movement during the days ahead. Fixed rate mortgages are now as cheap as they are going to be for some time, or at the very least are close to bottoming out. While rates are significantly higher than they were twelve months ago, buyers are adjusting to the 'new normal' and activity levels have recovered during the relative stability of January. 

"Before Thursday's decision, the best five year fixed products could be found as low as 4.19%, while the best trackers sat at around 3.94%.

"Tracker rates will now rise and we now expect many five year fixed rate products to be cheaper than tracker products for the first time since the mini-budget.

"Many buyers have been waiting on penalty-free tracker products for fixed rates to fall. This could be the moment that we see large numbers opt to switch to fixed products, because it's unlikely that we'll see rates fall much further."

Read more about interest rate hikes.