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What the base rate rise means for you

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Written by: Emma Lunn
03/02/2022
The Bank of England has raised the base rate by 0.25% to 0.5% – following on from the increase from 0.1% to 0.25% in December.

The decision by the bank’s Monetary Policy Committee came on a day full of bad news as millions of Brits face higher energy bills due to an increase in the energy price cap.

The base rate could rise even more incoming months as the bank tries to curb soaring inflation. Higher interest rates will impact both borrowers and savers

What the base rate rise means for your mortgage

Borrowers on variable rate mortgages can expect the rise to be passed on swiftly, and those who are remortgaging to a new fixed rate will feel the pain too.

According to Hargreaves Lansdown, the December hike saw the average tracker mortgage rise from 3.38% to 3.53% by January, while the average standard variable rate rose by one basis point, to 4.41%.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “For three quarters of mortgage holders, higher rates will only become a problem when their fixed rate deal comes to an end.

“Unfortunately, new fixed rate deals rose for the third consecutive month to January – and given that the market is expecting more rises in the months to come, we can expect these to keep shifting northwards. It means it’s worth locking in a new fixed rate as soon as possible – which can be up to six months before your fix comes to an end.”

For those people hoping to get on the property ladder for the first time this year, the base rate hike is bad news.

Lucy Pendleton, property expert at estate agents James Pendleton, said: “The direction of travel is clear and this will be bringing first-time buyers out in a cold sweat. Affordability is already stretched thanks to low supply and valuations at record highs. Now those trying to get on the ladder face increasing borrowing costs in the face of valuations that remain sky high thanks to an absence of stock for sale.”

A higher base rate is also likely to impact interest rates charged on loans and credit cards – these are likely to go up too.

Will savings rates go up?

In theory, an increase in the base rate is good news for savers. But not all savings providers will pass on the full rate rise.

Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Saving rates aren’t anything to shout about at the moment – and this will likely remain the case despite the modest uptick in the base rate. Saving rates have only gone up a smidge since December’s interest rate hike and banks and building societies might be even slower in passing on the latest increase – if at all. Even so, it still pays to shop around for the best deal.”

Even where the full rate rise is passed on to savers, experts warn that it won’t make a big difference to people’s financial situations.

Steven Cameron, pensions director at Aegon, said: “Today’s rise, if passed on to cash savers, will offer them a small glimmer of hope after seeing interest rates barely scraping above zero of late. But to put this in perspective, an extra 0.25% interest on £10,000 savings will provide £25 a year, which won’t go very far towards the £693 energy bill increase an average household faces.”

With inflation currently standing 5.4%, and expected to rise further, it’s impossible to find a savings account that beats inflation. This means that cash savers are losing money in real terms.

Base rate rises are one of the mechanisms the Bank of England uses to try and keep inflation under control, as higher borrowing costs generally mean people spend less.

Low income households will struggle

Obviously, rising inflation also means the general cost of living is on the up which is likely to mean the poorest households will struggle to cope.

Shop price inflation has nearly doubled since January, while food poverty campaigner Jack Monroe has highlighted that supermarket prices are rising while budget and value ranges are being cut.

Jobson says: “On top of losing the £20 uplift to universal credit, the rising cost of living has obliterated the modest increase to benefits. This imbalance between the rate of inflation and the uprating of benefits is set to worsen in spring, with the Bank of England predicting inflation could peak close to 6%, while energy bills are set to rise by as much as 50%.

“Many middle-income households will also struggle with the extent of the increase to bills that they’re going to see. The financial burden is compounded for those who have made the transition from home to office work in recent weeks, with the return of commuting adding to the financial load.”

National Insurance is also set to increase from April, putting further strain on incomes with workers set to pay 1.25p more in the pound from their wages. The increase will hit the take-home pay of millions in the UK, resulting in an employee on £20,000 a year paying an extra £130, while someone on £50,000 will pay £505 more.

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