The Bank of England has increased its base interest rate to the highest level in 13 years in an attempt to tackle inflation. The rate has gone from 0.75% to 1% - a figure not seen since early 2009.
The bank - whose decisions influence the interest rates charged on debts and loans across the UK, along with those on savings - has also forecast that inflation is set to rise from the current 7% to above 10% in the autumn. Members of the Monetary Policy Committee (MPC) have already raised rates at each of their past three meetings to try to rein in inflation, which hit its 30-year high of 7% in March.
Fears of a UK recession are also now increasing, as the economy only expanded by 0.1% in February this year, on top of the biggest fall of living standards since the 1950s, the Mirror reports. Bank of England Governor Andrew Bailey recently warned that the institution was “walking a very tight line” between tackling inflation and avoiding a recession.
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Raising interest rates affect people with certain types of mortgages like lender revert rates, or Standard Variable Rates (SVRs). People will have to wait and see if their lender will pass on the rate increase in full or only in part. You can get more money news and other story updates by subscribing to our newsletters here.
Why is this happening?
Inflation, which measures increases to the cost of living, remains stubbornly high, according to British real estate company Zoopla. In the 12 months leading up to January, 2022, Consumer Prices Inflation – the key measure - ran at 5.5%. This was the highest level for 30 years.
The war in Ukraine has put further pressure on this as the price of petrol, food and energy soar. The Bank’s Monetary Policy Committee uses changes to interest rates as a way to control inflation. But with inflation currently running significantly above its 2% target, there may be further interest rate rises to come.
What does this mean for you?
The base rate rise will affect most mortgages unless they're fixed. However, the vast majority of mortgage holders in the UK have a fixed-rate mortgage, which means for most people nothing will change.
You will only be impacted by the change in interest rates if you are on a variable rate mortgage, such as a tracker deal or your lender’s SVR, according to Zoopla. This is because these sorts of mortgages move up and down in line with changes to the bank's rate. You'll often be on an SVR after your fix or tracker ends.
According to Moneyfacts, the average SVR mortgage went up by 0.10% to 4.71% in April, to reach a two-year high. Finance expert Martin Lewis said the change means variable mortgage costs will increase by around £12 per month per £100,000 mortgage.
Martijn van der Heijden, at broker Habito, added: “For the quarter of UK homeowners who are on a variable, tracker, or standard variable rate, any vote to raise the base rate will mean they see their repayments go up; on tracker mortgages the change will be immediate and certain, but on a variable rate, it’s up to the lender. If you’ve not remortgaged for a while and have slipped on to your lender’s standard variable rate - it’s very likely you’ll now be paying more.
“The better news for 74% of UK homeowners who are on a fixed rate deal is that the base rate rise won’t lead to an immediate financial hit. That said, if the bank does need to raise rates again - and financial markets believe this could happen over the summer - when you do come to remortgage, we could see mortgage prices higher than where they are now."
What should I do now?
If you have a fixed rate mortgage, you don’t need to do anything, as you will not be impacted by the change. If you are currently on your lender’s standard variable rate, you should think about remortgaging on to a more competitive deal, Zoopla advises.
If you are on a tracker deal and want to protect yourself from further interest rate rises, you may want to consider moving to a fixed rate one. If you have a tracker mortgage it is also important to check that you would not have to pay any earlier redemption penalties if you switch to a different mortgage before your term is up. If you do decide to remortgage, you should be prepared to move fast.
In March, Zoopla said lenders withdrew a total of 518 deals during the past month, the biggest drop in mortgage availability at that point since May, 2020, during the early stages of the Covid-19 pandemic. It says on Zoopla's website: "If you think you may struggle to keep up with your mortgage repayments following the run of interest rate rises, it is important to contact your lender as soon as possible.
"There are a number of steps lenders can take to help you, including granting you a temporary payment holiday or putting you on to an interest-only mortgage for a short time. But options become much more limited if you have already missed a payment."
