The 0.75% jump from its level of 2.25% marked the steepest single increase since 1989. This is also the highest the base rate has been since November 2008, matching the 3% at the onset of the financial crisis.  

It now means the base rate has risen for the eighth consecutive time as the Bank attempts to tackle soaring inflation which rebounded to 10.1% in September.

The Monetary Policy Committee gave new projections on inflation, saying it would fall towards 10% in Q1 2023. 

SVR mortgage holders to be hit

But for borrowers with credit or a mortgage, the continuing eye-watering inflation coupled with rising rates means many will be facing even more pressure.

There are an estimated 895,000 borrowers on their lender’s standard variable rate (SVR) according to trade body UK Finance, and for these households, they are likely to see a significant jump in monthly mortgage payments.

Karen Noye, mortgage expert at Quilter, said: “A good rule of thumb is that a lender’s SVR is around 2 – 5% higher than the Bank of England’s base rate. Therefore, now the Bank of England has raised the base rate to 3%, in the best case scenario someone will be paying around 5% interest on their mortgage and potentially up to 8%, if on an SVR.”

Noye said that borrowers have had to find an additional £86 for the average mortgage.

She explained: “Let’s assume that yesterday when the base rate was 2.25%, someone on their lender’s SVR was paying 4.25% interest on a £200,000 mortgage over 25 years then they would have been paying about £1,083 per month. Now the base rate has climbed to 3%, the SVR will also climb to a conservative estimate of 5%. That same mortgage at that interest rate would cost £1,169.”

Fixed and tracker holders safer…for now

Meanwhile, there are an estimated 715,000 people on trackers and 6.5 million on fixed rate mortgage deals who are, for now, somewhat protected amid the rising rate environment. But 600,000 are expiring in the second half of 2022 and 1.8 million will come to an end at any point in 2023.

However, Rob Morgan, chief investment commentator at Charles Stanley, said it is “somewhat odd” that fixed rate mortgage deals are starting to become a bit cheaper despite this interest rate rise. This is because they are driven by what the market expects to see over the term of the deal.

“With interest rate expectations having dropped since Kwasi Kwarteng’s now infamous mini Budget, fixed mortgage rates have slightly improved. The appointment of Jeremy Hunt as chancellor, subsequent reversal of mini Budget measures and the arrival of Rishi Sunak in Number 10 has stabilised the political scene and sent gilt yields – which dictate the price of fixed rate mortgages – falling”, he said.

House prices set to drop as recession on the horizon

But for Noye, fixed rate mortgage holders are still in for a shock. She said: “Anyone coming to the end of longer fix rate deal will be shocked by how much their monthly payments will now be in this new interest rate environment. These extra costs on top of food and energy prices rises may add up to a winter of discontent for many. This could cause a wave of people to opt to try and sell their home to opt for something smaller. If lots try and do this at the same time, the laws of supply and demand dictate that house prices will drop as stock mounts on the market but demand dries up.”

For Jack Roberts, CEO of home moving platform SlothMove, the UK housing market is headed for recession and a “badly needed correction”.

He said: “It might take a few weeks for the bar charts to show it but this latest rate rise is confirmation enough that the lending environment will no longer permit growth. The eventual winners will be the first-time buyers who have seen affordability ratios stretched to breaking point, destroying the dream of home ownership in many cases.

“A housing market that has been climbing for months, seemingly blissfully unaware of the economic carnage around it, has probably already peaked and the next six months are going to feel very different. Mortgage rates are climbing too fast and consumer confidence is so low that even a measured decline in property prices may be unrealistic.”

Explore all tax relief and allowances

The base rate is predicted to reach 5% next year, so no matter your personal circumstances, individuals are already feeling the effects of inflation, interest rates, energy, food and fuel price rises.

Shona Lowe, financial planning expert at abrdn said: “As we all now eagerly await the delayed fiscal statement later this month, rumours will be going into overdrive on how the government plans to respond to the never-ending inflationary and rate increases.

“However, regardless of what they announce, people need to be taking matters into their own hands to protect their finances. Reconsidering priorities and finding strategic ways to cut back on spending will be key for many, along with making sure you are using all the tax reliefs and allowances available to you and seeing how you could stay closer to or beat inflation by making good investment choices. Speaking to an expert can help you understand the options available and navigate you through these challenging times.”

Pension and protection warning

Les Cameron, savings expert at M&G Wealth, said while people may be looking to cut back, they should maintain their pension plans.

He warned: “It’s important to think very carefully about stopping pension contributions, as your employer may be matching these contributions which is a valuable benefit to give up. Rebuilding your pension fund to where you could have been if you had not stopped could be hard.

“Likewise, stopping any protection policies needs very careful consideration. That protection is there for a very good reason which has not changed with interest rates rising, and there is no guarantee that you’d get the same terms if you looked to restart any cover.

“Reviewing your finances and ensuring your money can be resilient against future challenges is now more important than ever. Seeking professional financial advice can be the best place to start.”