Bill shock for millions as base rate hiked to 2.25%
The Bank of England has increased the base rate from 1.75% to 2.25%. Here’s how it will impact your money.
Today’s rise (0.50 percentage points) marks the seventh time in a row the rate has risen, matching the largest rate hike seen in August when it was upped 0.50 percentage points from 1.25% to 1.75%.
At its latest meeting, five members voted to raise the bank rate by 0.5 percentage points, while three members preferred to increase it by 0.75 percentage points to 2.5%. One member voted to raise it by a smaller 0.25 percentage points to 2%.
The Bank started increasing the base rate in December 2021 after the rate had sat at a record low of 0.1% since March 2020 when the pandemic begun. They now stand at their highest level since December 2008.
The bank’s Monetary Policy Committee was due to announce the base rate decision last week on 15 September, but it was delayed due to the death of the Queen.
The decision to put the base rate up to 2.25% is an attempt to keep inflation under control. It currently stands at 9.9%, against a target of 2%.
Committee members noted that the government’s energy price guarantee is “likely to limit significantly further increases in inflation, and reduce its volatility”.
As such, inflation is now likely to be lower than projected last month, at just under 11% in October.
“Nevertheless, energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back”, minutes of the meeting read.
‘Eyewatering increase in monthly mortgage repayments’
Amid the current cost-of-living crisis, the rate hike will come as a blow to the two million homeowners with a variable rate mortgage – these borrowers will see their payments increase.
According to data from Moneyfacts, average standard variable rates (SVR) have risen from 4.4% in December 2021 to 5.4% in September.
Rachel Springall, finance expert at Moneyfacts, said: “The mortgage market has seen relentless rate rises this year, and borrowers coming off a fixed mortgage will find the cost to secure a new deal is much higher than they were perhaps anticipating. This could not come at a worse time amid a cost of living crisis when household budgets are stretched. However, failing to fix and falling onto a standard variable rate (SVR) is unwise, as the average rate has risen to its highest level in over a decade.”
Meanwhile, calculations by Totally Money and Moneycomms show that on a £150,000 mortgage (SVR), a 0.5% increase will add £37 a month, while those with a £250,000 mortgage will see their monthly payment leap by £62 a month.
Factoring in all the base rate hikes since December 2021, they calculate that homeowners with a £150,000 mortgage have seen costs rise by £168 a month since November 2021. On a £250,000 mortgage, monthly costs have increased by £280 a month.
Andrew Hagger, personal finance expert at Moneycomms, said: “The MPC decision to hike rates for the 7th time in a row since last December shows how severe the current inflation problem has become.
“Mortgage borrowers approaching their fixed rate renewal are in for a massive shock when they see the eyewatering increase in their monthly repayments.
“Facing hundreds of pounds extra in mortgage repayments on top of soaring food, fuel and energy costs means some borrowers will face a serious monthly budget deficit.”
Mortgage holders with a fixed rate won’t be affected by the rate rise yet – but for the three million whose fix expires in the next two years, they will find it more difficult to remortgage to a competitive fixed rate. Moneyfacts revealed average two-year fixed mortgages have jumped from 2.34% to 4.24%.
Springall added that borrowers on a revert rate (SVR) who want to protect themselves from a rise in mortgage repayments could save thousands by switching to a fixed deal. The difference between the average two-year fixed mortgage rate and SVR stands at 1.16%, and the cost savings to switch from 5.40% to 4.24% is a difference of approximately £3,213 over two years. A rise of 0.50% on the current SVR of 5.40% would add approximately £1,443 onto total repayments over two years.”
Effect on savers
Savers, in theory, should be able to find a better return on their money now the base rate has risen. However, it is currently impossible to find a savings account that beats inflation so cash savings are losing their value in real terms.
It may also take lenders longer to pass on the rate rises, and they may not pass on the full hike.
Springall said: “The variable rate savings market has experienced a positive period of rejuvenation since the start of the year, but this is largely due to competition in the top rate tables, whereas the back-to-back Bank of England rate rises have yet to be fully embraced by every savings provider, particularly some of the biggest high street banks. Savers hoping to be rewarded for their loyalty will be disappointed that not one of the biggest high street banks has so far passed on all six base rate rises to easy access accounts since December 2021**, which equate to 1.65%.”
Servicing debt will become more expensive
A higher base rate is also likely to impact interest rates on loans and credit cards, making it more expensive to borrow money or pay off debt.
However, for those with a fixed rate personal loan, there’s no change as it’s set for the term of the loan.
But, it may become harder to be accepted for a loan as banks could become stricter on affordability, particularly around a borrower’s ability to continue making higher repayments.
Alice Haine, personal finance analyst at DIY platform and coaching service, Bestinvest, said: “Consumers borrowed an additional £1.4bn in credit in July, a further jump on the increase of £1.8bn in June – with half of that sum on credit cards alone – highlighting just how difficult the current environment has become.
“Anyone with an existing fixed-rate personal loan or car loan does not need to panic yet as the terms of their loan have already been agreed, but new borrowers shopping around for credit may find the cost of debt higher.
“Anyone with a small credit card balance they are struggling to clear should consider switching to a 0% balance transfer deal to buy themselves some breathing space. This gives them an interest-free period to pay back the debt at their own pace without the fear of the debt compounding out of control.”
Haine added that for anyone with more substantial debts, such as a large overdraft or multiple maxed-out credit cards, consolidating them into a personal loan with one fixed repayment a month may ease the financial stress that can come with heavy liabilities.
“Personal loan rates have been on the rise in recent weeks but they are still relatively low and while the ultimate strategy in this ongoing cost-of-living crisis is to trim your expenditure where you can rather than take on additional debt. If there is no other option, then look to borrow as little as possible over the shortest time possible at the lowest rate you can find.”