The Bank of England has raised the base rate by 0.50%, taking it from 1.75% to 2.25%, the highest it has been for 14 years. In this article, we reveal the impact the latest base rate rise is likely to have on both savers and borrowers. We also provide some resources and tools to help those that are considering remortgaging.
Why has the base rate increased?
Analysts had initially predicted an increase of 0.75%, however, the Monetary Policy Committee only felt it necessary to raise the Bank of England base rate by 0.50% in its effort to tackle spiralling inflation. It is hoped that with the base rate of interest now at 2.25%, borrowing and spending will slow, encouraging more people to save. This should, in theory at least, help to curb inflation, which currently stands at 9.9%.
Rate rises and how they impact you - 2021-2022
The latest Bank of England base rate increase is expected to help slow down inflation, which, at its current rate of 9.9% has many fearing a recession is on the horizon. Members of the Monetary Policy Committee will also be keen to demonstrate that these tough decisions will bear fruit over the medium to long term and echo even braver moves from the European Central Bank and the US Federal Bank, both of which raised the base rate of interest by 75 basis points in recent days.
|Date||Interest rate rise||Previous interest rate||New interest rate||Increase to average monthly mortgage repayments per £100k borrowed*|
|16th December 2021||+0.15%||0.10%||0.25%||£8|
|2nd February 2022||+0.25%||0.25%||0.50%||£13|
|17th March 2022||+0.25%||0.50%||0.75%||£13|
|5th May 2022||+0.25%||0.75%||1.00%||£13|
|16th June 2022||+0.25%||1.00%||1.25%||£13|
|4th August 2022||+0.50%||1.25%||1.75%||£26|
|22nd September 2022||+0.50%||1.75%||2.25%||£26|
*assumed mortgage term is 25 years
How will the base rate increase affect you?
Worryingly, the latest interest rate rise comes in a week when many households have received communications from energy providers, detailing the higher costs of energy and what they will be expected to pay from the 1st of October. Despite the recent announcement of the government-backed energy price guarantee, many households are becoming increasingly stretched. Below we explain the impact that an interest rate rise has on both borrowers and savers.
Approximately three-quarters of mortgage holders are on a fixed rate mortgage deal, protecting them from the latest interest rate rise. Appetite continues to grow for longer fixed rate deals with the mortgage market releasing 10-year fixed rate deals that are proving widely popular. If your fixed rate is coming up for review then you may benefit from reading our article, "Remortgaging in 2022 – is now the right time to fix & for how long?".
On the other hand, those with tracker or variable rate mortgages will see their mortgage payments rise in line with today's announcement but lenders usually take some time to implement the increase, so exactly when you will see the increase will depend on your lender. Working out what effect the increased base rate will have on your monthly mortgage payments is simple by using our interest rate rise calculator all you'll need are your mortgage term, balance and current interest rate figures.
Those on a fixed deal that is coming to an end would be wise to work out the impact that the latest rise has on them and budget accordingly. As a rough guide, the 0.50% rise will mean monthly repayments on a 25-year mortgage will rise by approximately £25-£26 per month for every £100,000 you owe. Remember, however, if your current fixed-rate deal was in place before December 2021, you will need to include the cost of all of the rate rises combined. This works out at an increase of roughly £112 per month, per £100,000 borrowed, based on a 25-year mortgage term.
Those worried about the latest interest rate rise should speak with an independent mortgage broker* as they will be able to explain how much it will cost and the best way to remortgage. It is important to check your paperwork to see if there are any Early Repayment Charges (ERC) and it is wise to check how long is left on your current deal. They will be able to weigh up your options and compare what mortgage rates and deals are available to you. They will take you through the pros and cons of whether to fix and for how long while ensuring you don't overlook any early repayment charges while you do so. You can get started by taking a look at deals using our mortgage best buy calculator too.
Loans, Credit Cards & Overdrafts
Much like a mortgage, those with existing debts that have a fixed interest period, such as loans, credit cards and overdrafts, will remain unaffected by the base interest rate increase. However, you should expect that once the term for your current rate expires, new rates offered by the lenders and providers are likely to be higher.
Those applying for new forms of credit may want to try and speed up the process, securing the product before lenders begin to implement the interest rate hike. Likewise, those that are paying interest on a credit card may want to explore the Best 0% balance transfer credit card deals to avoid a potential rate hike.
Will the increase to the Bank of England base rate reward savers?
Yes, savers have seen relatively low rates of interest for some time now so the increase to the base rate of interest will be welcome news. It does, however, take some time to filter through and so don't expect to see improved rates on savings products straight away. Savers looking for the best rates available can find these in our savings best buy tables.
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