The Bank of England has increased the base rate from 4.5% to 5% – taking it to its highest level since the 2008 financial crisis.
The central bank uses this rate to set the borrowing costs for other banks and lenders. As a result, it affects both the interest rates that borrowers pay and the returns that savers receive.
The Monetary Policy Committee (MPC) of the bank voted 7-2 in favour of a 0.50% increase, noting that it was trying to bring higher-than-expected inflation under control. CPI (a measure of inflation) is currently at 8.7%, well above its target of 2%.
In this short blog, we give a brief overview of how an increase in the base rate affects you and your finances.
Tracker mortgage - Typically, tracker mortgage rates do not exactly match the base rate, but they’re set at a level just above it. Therefore an increase or decrease would normally see your mortgage rate follow this. In this case of a 0.5% increase, every £100,000 you owe on a 20-year repayment term, you will see your payments go up by £29 per month.
Standard Variable Rate mortgage - It is at the discretion of the lender whether they follow the BoE interest rate, although most do so be wary of how this affects your payments!
Fixed mortgage - Your rates will not immediately increase. If you're coming off a fixed rate, you'll likely see a rate increase. Many borrowers are seeing mortgage rates go from 2% up to 6% as they come off their fixed terms. If you are coming off your fixed rate soon, it is worth speaking to an independent broker who can search for the best deal for you.
A positive outcome of the rising interest rates is higher savings rates. Some lenders may increase their rates straight away, while others will wait to see how the rest of the market reacts. Either way, it is worth reviewing your savings to get the most interest possible.
Personal loans are typically taken on fixed rates so if you already have a loan then this should not affect your current payments.
Credit card rates are variable, but aren't typically explicitly linked to the base rate, so they won’t necessarily go up immediately. If they do then your credit card provider must give you notice before this happens.
This content provides is for educational purposes only and does not constitute personal advice. Should you need advice, please request it.