The Bank of England has imposed the biggest interest rate hike since 1995 in a bid to tackle inflation, but is adding significant costs to borrowers in the process.
Consumer finance experts told Sky News there were significant savings to be had by switching to a fixed rate mortgage deal and shopping around for higher savings rates after the Bank rate – used to determine tracker and standard variable revert rate (SVR) mortgage repayments – was raised to 2.25% by policymakers in the City.
It marked the second time in since last month that a hefty increase, of half a percentage point, has been imposed following six previous but smaller hikes, since December.
It follows hot on the heels of sharp rate hikes by the US central bank the Federal Reserve, the, as central banks enact aggressive stances against inflation.
Why is the Bank raising interest rates?
It is all part of efforts to get inflation under control under the Bank’s remit for inflation to reach a target rate of 2%.
More on Cost Of Living Related Topics: Cost of livingInflationIt is worried about domestic pressures, especially a tight labour market pushing up wages.
But it also puts the blame for rate rises squarely at the feet of Vladimir Putin.
AdvertisementThe main consumer prices index (CPI) measure of inflation currently stands at 9.9%. The Bank now predicts it will peak at 11% next month as energy prices continue to climb across Europe because of Russian curbs on gas exports to the continent.
Rate hikes are designed to take demand out of the economy – helping cool the hot pace of price growth and wages faster than would otherwise be the case.
I thought the Bank could not control energy costs?
It can’t.
The Bank’s big problem here is that the energy crunch is a supply issue it can do nothing about.
Its focus is therefore on speeding up the transition to easing inflation, which, for example, has included pleas for wage restraint.
The Bank fears pay settlements in line with inflation, currently being sought by many unions, will make inflation even more stubborn to bring down.
So who is left worse off by rising rates?
Any borrower.
The simple fact of life is that if the Bank rate goes up, so do the interest rates paid by businesses and individuals for loans unless they are on fixed-terms.
When it comes to housing, there are still nearly two million households on tracker and SVR deals which collectively make up about a 20% of the mortgage market, according to the banking and finance industry representative body, UK Finance.
The organisation said it expected repayment increases of £49 a month for tracker mortgages and £30.81 a month SVR mortgages.
According to figures from estate agent Hamptons, first-time buyers on a two year fixed payment mortgage, who have taken out a loan on 90% of their home value, now face paying £280 more per month than they were doing when rates started to creep up last December.
For London fixed term mortgage holders, who have a loan on 75% of their home value, the increase is £288.
For those across the rest of Britain the additional payment, for those with the same mortgage terms, is £534.
Thursday’s hike increases the chance of further increases in mortgage rates during the months ahead.
The message from Knight Frank estate agents is move now to make savings.
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“Borrowers that act quickly stand to save a lot of money. Several lenders now allow borrowers to lock in deals as many as nine months in advance,” Simon Gammon, managing partner at Knight Frank Finance, said.
“Headline five year fixed rates sat at 1% as recently as December. Now you’ll be lucky to find any five year money lower than 3.5%. If pricing in financial markets turns out to be correct and we do see the base rate reaching 4% around the middle of next year, we’d expect the best five year products to be around 5.35%, which will be a shock for borrowers rolling off two year deals.”
What about fixed rate deals?
The cost is – inevitably – also on the march because the Bank rate is going up.
The key thing here though is current holders of a fixed rate deal will feel no pain until such time their deal expires.
What about business and personal loans?
It is clear that banks are generally demanding an improved rate of return but much depends on the financial circumstances of the customer as levels of risk will be different.
0:26 PM makes pledge to businessesIf borrowers are paying more, why are savings rates failing to keep up?
The old adage goes that lenders are quick to punish but slow to pass on any benefits.
Given the pace of inflation, at 9.9% currently, savings power remains well and truly eroded.
What can I do to shield myself from rising rates?
The advice is to shop around for financial products with consumer groups, charities and switching services all offering help in finding the most suitable deals.
When it comes to mortgages, affordability criteria are crucial.
How are consumers in other countries faring?
The problems of inflation and high energy costs are, of course, not unique to the UK.
In fact, when it comes to repayment of debt, UK consumers are doing better than some.
In America, nearly half (44%) of those surveyed by payment systems company Marqeta reported struggling with credit card debt in the last 12 months. However, only 29% of those in the UK struggled, fewer than 31% of Australians.
