It’s bad enough that food, fuel and ‘everything else’ inflation has been running wild over the last 18 months. The last thing anyone needs is their mortgage going up too. And the one thing worse than a mortgage repayment going up, is a mortgage repayment going up many times. And quickly. So, what should we make of the headlines regarding ‘soaring mortgage rates’? Is something extraordinary happening?

In terms of the current mortgage rates, no. In fact, quite the opposite. Variable mortgage rates generally track Bank of England base rate, and the Bank of England base rate is currently 5%, up from below 1% in January 2022. But this is not extraordinary.

The Bank of England was founded in 1694, and for the first 315 years of its existence, their interest rate varied between a low of 2%, and a high of 17%, but on average through that period the rate was 4.7%. Following the Great Financial Crisis of 2008, interest rates fell to an extraordinary low of below 1% where they stayed until these recent rises. The extraordinary period was the last decade or so. Rates are now back to where they have – ‘normally’ – been.

That is cold comfort to anyone struggling to pay the bills. And the issue is not the absolute level of the interest rate, but the rapid change. Rates have changed faster than many people could reasonably be expected to adjust. Yes – it can be argued that people should have known that rates can go up, but would we really expect people to study the multi-centenary patterns of interest rates before buying their dream home? Interest rates have also been ‘stressed’ at the point of lending. This means that lenders checked that consumers were able to make their repayments even if rates were to rise. However, we are now about at the limit or slightly beyond the scenarios that were tested. Furthermore, the market thinks that rates may have not yet reached the peak, so there may be more pain to come.

So, is there any good news? Some. First, the number of people on variable mortgages has declined significantly in the last decade as: a) the total pool of mortgaged properties is now broadly the same as the unmortgaged population and b) the mix within mortgages has moved to circa 80% fixed, and 20% tracking base rate. This does not make the problem go away, but it does give borrowers on fixed term mortgages time to adjust. And that is the key. People need time and support to adjust. Personally, I believe that a lot was learned through the financial crisis, and my hope is that financial service providers will work closely with regulators, Government, debt help charities and consumer groups to help homeowners navigate a very difficult transition.

And what about the other side of the coin….savings rates? Savings rates are moving up, but not as fast as mortgages. Why? While it is easy to round on the banks, there is one fact that is not getting much airtime. That is that people have a lot more money stored in savings than borrowed in variable rate mortgages. In some institutions, the ratio will be around 4:1. That means that for every pound increase in variable mortgages, banks can redistribute 25 pence to each saver. Doubtless more can and should be done to help the plight of the prudent savers that have suffered over a decade of record low rates. But loans in general will always reprice faster than savings.

We are at the start of a difficult transition back to a world where inflation is above the recent historical lows, and interest rates too. It is painful to make the adjustment, but we can do it. Why do I think this? Because interest rates around 5% is not a new phenomenon. It is, in fact, very, very old.