The news that the Bank of England was putting up the bank base rate this month came as less than a complete surprise.
With inflation soaring and set to reach even more dizzying heights as energy price increases kick in it was inevitable – although a second hike in just 3 months may have been sooner than many expected.
To sound dramatic, we can say that the rate actually doubled, from 0.25% to 0.5%. To be a little more realistic we can say that the increase is a barely noticeable quarter of one percent.
But what will the real effects be? At Continuum we are looking at the answers.
What is Bank of England base rate?
The base rate is the rate the Bank of England charges banks and financial institutions for loans. It is the Bank’s, and therefore the government’s, key tool for controlling the economy. It is being hiked to try and damp down inflation.
Low interest rates mean that people can afford to spend more. A hike in the rates means they will spend less, hopefully reducing inflation.
Technically, the rate hike only affects banks and other financial institutions, who have to pay more to borrow the money they work with. But they immediately pass changes on to their customers.
What will the impact be on your finances?
Since the financial crisis of 2008, we have grown used to low rates, and made financial arrangements accordingly. Two areas may be immediately affected.
Mortgages Higher interest rates mean higher mortgage costs, although for many homeowners the impact is not immediate, and some will escape it entirely.
Some 74% of mortgage borrowers in the UK are on fixed-rate deals. If you are among them, you will only see a change in repayments when your current term ends. Of the remainder, 850,000 homeowners are on tracker deals, and the other 1.1 million are on standard variable rates, and their rates will go up this month.
The increase in the Bank rate to 0.5% means a typical tracker mortgage customer’s monthly repayment will go up by £25.76. The typical SVR customer is likely to pay £15.96 more a month.
Paradoxically, the rate rise may mean better deals for some. Costs for those with 25% deposits or more will rise but those on 5% deposit deals – who never enjoyed the lowest rates – may see repayments fall. Low-deposit deals were expensive during the pandemic. Now, with banks gaining confidence as we emerge from the pandemic, the cost of those deals may become more competitive.
Savings Savers might hope to see better returns on their cash on deposit with banks and building societies, but it may be a long while coming. Banks have no pressing need for savers cash, so they are unlikely to put up rates to attract it.
The average interest rate for an easy-access account is 0.19%, up from 0.17% in December. For easy-access accounts closed to new customers, it is 0.24%, up from 0.22%.
All these rates are still woefully low compared with inflation running at more than 5%.
This is not the end of rises. The Bank of England Monetary committee, which sets the rate, will next meet and announce its decision on March 17. An increase that soon is unlikely, but the rate is widely forecast to reach 1.25% by the end of the year.
This will push up mortgage costs dramatically, just as borrowers face a 54% rise in energy bills.
On the more positive side, many observers predict rises in mortgage rates to be slow and measured, which would mean mortgages stay cheap for some time. What’s more, every mortgage applicant since 2014 would have had a stress test to prove they can pay at a rate of about 6% or 7%.
So perhaps the best way to treat the rate rise is as a wake-up call. There is no need to panic, but it might be time to look at your current mortgage and see if you could lock in low rates with a fixed rate deal. 5 or 10 year deals may be available, and although no-one knows what the future holds, it seems fair to assume that – even with this month’s rate rise – mortgage deals may never be as low again.
Naturally, at Continuum we are ready to help you find the mortgage or remortgage deal that’s most appropriate for you – and which could lock you into low rates for years to come, whatever the next move from the Bank of England.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage product, you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate deposit accounts.