Interest rates across the UK have soared today, with the Bank of England (BoE) confirming its biggest rise in almost 30 years.
The central bank has increased the base rate of interest 0.5 percentage points - from 1.25 per cent to 1.75 per cent - marking the sixth consecutive year that rates have risen. It also marks the largest sole increase in 27 years.
This leap also sees UK rates at their highest level since the end of 2008 - in which GB suffered the 'Great Recession', the longest lasting recession to ever hit the UK.
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The base rate is the amount that the central bank charges other banks and lenders - which in turn influences the rate that they charge customers. If interest rates are higher, you'll most likely pay more to borrow from the bank on loans such as mortgages.
However, the Mirror reports that this announcement comes as good news for savers, as banks should in theory pay out more on your savings.
In a bid to try and cool soaring inflation - which also sits at a 40-year high of 9.4 per cent and is expected to continue to rise - the BoE is raising its interest rates. The theory behind this is that households should spend less, leading to a drop in inflation.
Just this week, the Resolution Foundation think tank warned that inflation could in fact hit 15 per cent next year, leading to futher squeezing and misery for UK residents. This means that interest rates will also continue to rise steadily, in a bid to keep inflation under control.
The BoE predicts that inflation could hit 13 per cent towards the end of the year - which is margins away from its initial target of 2 per cent in total. Last month, a Bank of England rate setting committee member announced that interest rates may have to hit 2 per cent or more next year.
It comes as energy bills continuously rise, piling on the pressure amid the ongoing UK cost of living crisis. The BoE today revealed that it expects the UK to enter recession in the last three months of the year, and throughout 2023 - as gross domestic product fails by 2.1 per cent.
Jane Tully, director of external affairs and partnerships at the Money Advice Trust, said: "Today’s interest rate rise, the largest in 27 years, will add to the worries of homeowners already struggling with soaring prices. October’s energy price rise is just around the corner and with inflation predicted to continue to increase into next year, there is little respite in sight for millions of people."
What it means for your mortgage:
If you're considered a homeowner, the type of mortgage deal you locked into will determine whether or not your repayments will increase. Those with a tracker mortgage will see their rate soar, as these deals move in line with the base rate.
If you're on a standard variable rate mortgage, you will also more than likely see your rates go up too. It will come down to lender to determine whether or not they will pass on the increase, with most major banks and building societies opting to do so.
Homeowners could in-turn see hundreds added to their bills after the 0.5 percentage point rise, as you will usually be on an SVR deal after your fix or tracker rate comes to a conclusion.
Around two million across the UK are on a variable rate mortgage. However, if you're on a fixed-rate mortgage, your rates will stay the same.
Brian Murphy, head of lending at Mortgage Advice Bureau, urged anyone on a variable rate to consider locking into a deal now ahead of more expected rate rises. He said: “New and existing borrowers should seriously consider locking a fixed term deal to protect them from any further rate rises.
“With economists predicting inflation to soar even higher, interest rates may well follow suit for a while longer."
What it means for your debts:
The cost of borrowing on credit cards and overdrafts could also see a rise following the base rate. While credit card rates are normally variable, meaning they change from time to time, they have been on the up in recent years.
However, your lender should advise you with notice if your rate is changing.
Interest rates on most personal loans and car financing are fixed, which means the rates on these shouldn't change, however, you may find cheaper loans start to disappear as most lenders will start to advertise a higher rate.
Garrett Cassidy, VP Financial Products at the money app Monese, said: "Lenders generally tighten their approval criteria as the cost of living increases so it could also get harder for some consumers to take out a loan from now on. This means some families could be faced with narrowing options when it comes to their finances."
What it means for your savings:
If you're got money stashed away into a savings account, you should see a higher return on the interest you're paid. Banks should pass on the interest rate rise - but there is no guarantee they will, and some take time to introduce new rates.
It is worth noting too that savings rates are also still painfully below the level of inflation. The top-paying easy access account right now is from Virgin Money and offers 1.71%.
If your cash is locked into a fixed rate account, then the rate you get in interest won't go up.
The top-paying one-year fix right now is from OakNorth Bank and offers 2.85%, while a five-year fix from Shawbrook Bank pays 3.4%.
Colin Dyer, financial planning expert at abrdn said: “While a higher-than-normal rate increase to 1.75% will be welcomed by savers, it’s still no match against the current 9.4% inflation. There is an undeniable financial pressure on cash-strapped households that will continue to mount in the months to come, with soaring energy, food and fuel prices showing no signs of slowing.
“A 0.5% rate rise won’t be enough to balance this out.“
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