The Bank of England’s latest interest rate hike will add to monthly mortgage payments for millions of borrowers, but provide some light relief for savers.
Here we explain the effects of the latest rise on different groups, as households grapple with a growing collection of financial pressures linked to surging inflation and a looming tax rise.
Mortgage borrowers
Industry body UK Finance estimated in December – when Bank rate was raised from its COVID crisis low of 0.1% to 0.25% – that 26% of home loans were on variable rates, translating to around 2.2 million.
Of those, some 850,000 had tracker deals directly linked to the rate.
AdvertisementIt said on Thursday that the picture had not changed, meaning there has been no rush to switch to fixed rate deals since borrowing costs first started going up.
“Following today’s Bank Rate rise to 0.5%, the monthly payment on an average tracker mortgage will increase by £25.76, and the monthly payment on the average SVR (standard variable rate) will increase by £15.96”, the body said.
It would mean those on tracker mortgages having to fork out an additional £309 per year.
The 74% of homeowners on fixed rate deals will only be affected by rising Bank rate levels when they come to find a new deal towards the end of their fixed term – usually a two or five year duration.
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Experts rushed to warn that the picture for these two million-plus borrowers was about to get even worse, considering that the Bank rate is expected by markets to hit 1.25% later this year – and rise further next year.
Laura Suter, head of personal finance at AJ Bell, said: “The Bank projects that base rate (Bank rate) will rise to 1.5% by mid-2023.
“If this is the case, homeowners with £250,000 of borrowing will have to pay an extra £1,956 a year, compared to the start of the year, while those with £450,000 of borrowing will have to find an extra £3,528 a year, or £294 a month.
“One option is to fix your mortgage now, so you lock in current rates and avoid any future interest rate rises.
“Mortgage companies have already started to increase their rates, and they’ll rise again now the rate rise has actually happened.
“Someone with £250,000 of borrowing on the average standard variable rate mortgage now could save £5,316 a year by switching to the current top two-year fix.
“If someone wanted to switch for longer, they’d save less each year, but more over the term of the fix.”
Rhys Schofield, managing director at brokers Peak Mortgages and Protection, said: “Anyone foolish enough to be sat on their bank’s standard variable rate is likely to see the amount of money they’ve been chucking down the drain each month increase, which is especially silly with utility bills about to go through the roof.
“My advice is that anyone whose mortgage deal has ended, or whose deal is due to end before the end of September, now needs to get on Google, search for mortgage brokers near them, and pick up the phone to whoever has the best reviews.”
The higher costs come at a time when rising prices from energy bills and fuel to food and clothes have already pushed inflation to its highest level for 30 years.
Higher mortgage and taxes – with the looming hike in National Insurance contributions due from April – on top will intensify that pain.
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Savers have been squeezed by ultra-low rates – which mean the value of their nest eggs is not keeping up with inflation – for many years.
They can take some comfort from the rate rise, though upwards shifts in Bank rate usually take longer to be passed on by banks and building societies.
According to Moneyfacts.co.uk, the average easy access savings account on the market was paying 0.2% in December, while the average easy access ISA paid 0.26%.
When you bear in mind that inflation in December stood at 5.4%, and that the Bank of England sees a level of 7.25% in April, small increases in savings rates will have a limited impact.
Ms Suter said: “If you have £10,000 saved and put it in the top two-year fix now you’d have made £327 interest at the end of the two years, but if you wait and savings rates rise by the same 0.25 percentage points as Base Rate, you’d make an extra £51 in interest.
“If Base Rate rises to 1.25% and all that gets passed on to savings rates, you’d make an extra £204 in interest at the end of the two years.”