Budgets will be squeezed and the price of new and non-fixed rate mortgages will rise after the Bank of England’s surprise decision to increase the base rate to 0.25 per cent.
The decision could hit ordinary people in the pocket, as the cost of living is already on the rise, but the move is being made to try to stall inflation spiralling further.
While the rate has increased by only 0.15 per cent, it comes on top of sharp increases in the cost of energy bills, fuel and buying a home in recent months.
Within an hour of the rate rise being announced, bank Santander said it would pass on the full rate rise to borrowers on its standard variable mortgage rate, which will rise 0.15 per cent to 4.49 per cent.
Rate rise: Households are being urged to keep on top of their budgets, and watch out for price increases on their mortgages and credit cards, as well as in the overall cost of living
The move will only add a relatively small amount to monthly payments for those with variable rate mortgages, while those with fixed rate deals will be protected for now.
Fixed rate mortgages amount for the vast majority of existing borrowing, but the cost of securing new fixes will increase for homeowners.
The rise was prompted by news yesterday that the Consumer Price Index measure of inflation had risen to 5.1 per cent. The Bank had originally predicted that it would not hit this level until spring 2022.
And it could be the first of several base rate rises in the coming months as the UK economy tries to recover from the pandemic while battling rising inflation.
In its statement, the Bank’s Monetary Policy Committee, which decided on the rate hike, said that ‘consumer price inflation in advanced economies has risen by more than expected.’
It also said more ‘modest tightening of monetary policy’ was ‘likely to be necessary’ to meet its target of reducing inflation to 2 per cent.
Economists have forecast an additional base rate rise to 0.5 per cent by spring 2022, and for the base rate to hit 1 per cent by the end of 2022.
Meanwhile, the Office for Budget Responsibility has predicted that the base rate could go as high as 3.5 per cent by 2023.
Households have been accustomed to the base rate being below 1 per cent, where it has remained since 2009.
It is the first time the base rate has increased in three years, and only the fourth hike since 2007.
The base rate was slashed from 0.75 per cent to a historic low of 0.1 per cent at the beginning of the pandemic in a bid to prevent economic shocks.
We explain how rising interest could affect household budgets, mortgages, savings and pensions.
While the base rate has increased by only 0.15 per cent, experts say that this could put even more pressure on households struggling to keep pace with the rising cost of living.
The cost of living has increased in recent months due to multiple factors.
Some expenses, such as the price of a weekly shop, may be made slightly cheaper by the small base rate rise.
But others such as rising energy bills and fuel costs are down to external factors and will not be impacted much by the interest rate decision.
Households who have significant debts could be particularly affected, as the interest rates on loans and credit cards will rise along with the base rate.
Successive base rate rises by the Bank of England could eventually make the price of goods in the shops feel more affordable, but this initial increase is unlikely to have a significant effect
Victor Trokoudes, chief executive and co-founder of the savings app, Plum, said: ‘The implications of this cannot be understated.
‘Anyone with debts of any kind should work as hard as they can to minimise the impact of the rate hike on their repayments.
‘We are facing a winter cost of living crisis that this first interest rate move isn’t going to fix right away.
‘Now more than ever, households need to manage their money carefully and be prepared for bill shocks to come. Making sure you are on top of your incomings and outgoings is essential.’
The Bank of England’s decision will drive up the cost of borrowing, which will arguably be felt most in the mortgage market.
Interest rates rising instead of falling may come as a shock to more recent homeowners. They have enjoyed rock-bottom rates for the last year, and were still able to borrow relatively cheaply for several years before that.
Those on their lender’s standard variable rate, discount deals linked to that, or a base rate tracker mortgage are the only borrowers that will see their payments increase immediately.
Interest on the up: Around a quarter of mortgage borrowers are on variable or tracker rates, and these will be the ones who will see an instant impact on their monthly payments
This represents around 20 to 25 per cent of existing mortgage holders, depending on which estimate you look at.
London estate agent Chestertons has run the numbers on this, and said that, for the typical joint-income household on a tracker mortgage, this will result in a monthly payment increase of £28.
The percentage of their gross income that the monthly mortgage repayment represents, it said, will rise from 18.9 per cent to 19.5 per cent.
The best way to avoid this is to switch to a fixed-rate mortgage, if the borrowers are able to qualify for one – and it would be wise to do this as soon as possible before interest rates rise further.
> See if you could get a cheaper mortgage with This is Money’s comparison tool
Charles Roe, director of mortgages at industry body UK Finance, had this advice for borrowers worried about rate rises: ‘For those who have come to the end of their deal, a wide range of mortgage products are available and we encourage homeowners to shop around and choose the best one for their circumstances.
When homeowners do come to remortgage, prices could be much higher than where they are now
Martijn van der Heijden, Habito
‘Any customers with concerns about managing their mortgage should contact their lender who will be able to explore the range of individual support options available.’
Those on fixed mortgage rates will keep the same rate until the end of their term, but experts say those on longer fixes could be in for a shock when they end.
‘The key take-out from today is that this could be the first hike of several,’ said Martijn van der Heijden, chief finance officer at the mortgage broker and lender, Habito.
‘A rising base rate environment is something many homeowners have never experienced.
‘Anyone who’s bought a home in the last 12 years has only ever had a mortgage during a time when base rates were 1 per cent or below.
‘Given that 74 per cent of UK homeowners are on a fixed rate deal, any discomfort from today’s base rate rise will be felt in the future, when their current deal ends.
‘However, the concern is that if the Bank does need to raise rates several times over the next 12 to 24 months, when homeowners do come to remortgage, prices could be much higher than where they are now.’
The housing market is still going strong. Experts say this could prompt mortgage lenders to keep rates on fixed products competitive for the moment, ahead of more base rate rises
Anyone coming to the end of a fix and needing to remortgage, will likely see rates rise only modestly from what they were prior to the base rate rise in the short term, according to experts.
This, they said, was because the busy housing market meant lenders were still keen to compete for new business, incentivising them to keep rates competitive.
Paul Broadhead, head of mortgage and housing policy at the Building Societies Association, said: ‘I expect the increase to be modest, tempered by the highly competitive mortgage market which is still being driven by relatively high demand and a sparse supply of homes.’
Online mortgage broker Trussle has come up with the following example of how the cost of a two-year fixed mortgage with a 15 per cent deposit on a £264,000 home (the UK average) would change.
Previously, Trussle’s cheapest interest rate with this criteria had been provided by Halifax, which offered an initial rate of 1.73 per cent.
The borrower would have paid £921.91 each month, but if the lender decided to increase the mortgage by the same amount as the base rate, 0.25 per cent, that would make the interest rate 1.98 per cent.
The monthly payment would then increase to £948.95, an increase of just over £27 a month or nearly £325 a year.
Some mortgage lenders have already increased their rates to accommodate an anticipated future rise, while others will do so now.
Financial information service Defaqto has rounded up the best remortgage deals currently available.
Best buys: Defaqto has rounded up the best mortgage deals currently on offer
While the cost of borrowing is likely to rise, experts said that all but the most cash-rich savers would see only a small increase in the pitiful returns they get on their money.
The average saver with £1,000 put away in an easy-access account would gain as little as £1.50 extra following today’s news.
Sarah Pennells, consumer finance specialist at insurer and pension fund Royal London said: ‘Despite today’s rise in the base rate, interest rates paid on savings are likely to remain historically low.
‘If you have £1000 in a savings account paying 0.7 per cent – the current easy-access best buy – you’ll earn a maximum of £7 in interest after a year.
‘Even if banks pass on the full 0.15 per cent interest rate rise, that still only adds up to approximately £1.50 extra interest after a year.’
Minimal: Interest rates for savers are likely to get slightly better, but the typical customer with an easy-access account will see an increase of just a few pounds
It means that there are still no savings accounts that match or even come near to the rate of inflation.
Even the best-buy five-year fixed-rate bond from QIB only has a return of 2.10 per cent.
This is Money has looked at the best savings deals currently available, and how the interest on these would improve if the banks decided to increase it by the same percentage as the base rate: 0.15 per cent.
|Cash deposit||Annual interest on Shawbrook deal paying 0.67%||Interest after 0.15% increase|
|Cash deposit||Annual interest on Investec deal paying 0.71%||Interest after 0.15% increase|
|Cash deposit||1st year interest on Zopa Bank deal paying 1.61%||Interest after 0.15% increase|
|Cash deposit||1st year interest on QIB (UK) deal paying 2.10%||Return after 0.15% increase|
> Compare the latest savings rates using This is Money’s independent tables
Victor Trokoudes, chief executive and co-founder of savings app, Plum, said: ‘Savings rates will get better as a result of this decision.
‘But we are still a long way from a typical savings account keeping ahead of inflationary pressures.
‘Savers still need to consider looking to investment markets for the foreseeable future to keep ahead of the devaluation of cash.’
However, investing is considered a risky option for those saving towards short-term goals, as most experts advise putting money away for at least five years to get the best returns and avoid losing money.
The Bank has predicted CPI inflation to hit 6 per cent by April 2022, which is bad news for state pensioners as they will receive an annual increase of just 3.1 per cent, also scheduled for April 2022.
Their payment will increase from £179.60 a week to £185.15.
The percentage increase was based on September 2021’s inflation figures, after the link to earnings was scrapped as the Government temporarily suspended the ‘triple lock’.
This means the money in their pockets will go up by just over half the amount that the cost of living is likely to have increased.
Experts said this could lead to more pressure for the Government to reinstate the triple lock.
Steven Cameron, pensions director at Aegon said: ‘A predicted inflation rate of 6 per cent in April will coincide with state pensioners receiving a 3.1 per cent increase, just over half of the cost of living increase year on year, and is likely to reignite calls for the Government to think again after dropping the triple lock.’
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