With a whole generation of borrowers used to historically low interest rates, any rate rise could come as a shock, especially with finances already stretched due to the cost of living crisis.

The Bank of England upped the base rate from 0.1% to 0.25% in December. The last increase before that was on 2 August 2018, and December’s increases was only the fourth hike since July 2007.

How will the rate rise affect your savings?

In theory, the rate rise is good news for savers, with some providers already upping their rates. For example, Recognise Bank launched a best buy 35-day notice account paying 0.75% last week.

But with inflation soaring to 5.4%, it’s impossible to find a savings account that beats inflation. The idea behind rate rises is to ease inflation and alleviate the cost-of-living crisis, but a rise will make many borrowers worse off.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: ‘’There’s no guarantee that any rise would be passed onto savers – the last one didn’t persuade the high street giants to budge an inch on easy access accounts. We’ve seen some sluggish movement on other accounts – and a few higher rates will kick in from 1 February – but only a tiny fragment of the market has passed on rate rises in full.

“However, the last rise helped the banks boost their margins, so they’re in a slightly different position now. The more rises we get, the more likely we are to see rates tick up even among the most reluctant institutions. Very few will do so in full, and most will take their time about it, so the best deals will be available to those who are prepared to shop around.”

How will a rate rise affect your mortgage?

Unfortunately, it’s likely that mortgage holders stand to lose more than savers gain. 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. The first of the rate rises came hot on the heels of the last hike, and have been feeding through into mortgage deals ever since.

Coles said: “The bank’s aim is to raise rates slowly and steadily, so we don’t get any nasty surprises. However, this doesn’t really have the same impact if we’ve fixed our mortgages for years, because we’ll face the consequences of all these rises at once. So, for example, if someone currently paying 1% on a £200,000 mortgage over 25 years remortgaged at the end of the fixed period to a new deal costing 2%, it could push up their monthly costs by £94.”

Brits worried about a rate rise

A study by Aegon shows widespread concern over interest rate hikes, with 38% of those questions concerned about the impact that rising interest rates will have on their personal finances.

Half are worried that the government will pass on the increase in government debt through tax raises with 35% concerned about higher mortgage interest payments and 27% apprehensive about credit card repayments.

Kate Smith, head of pensions at Aegon, said: “We are without question living in unprecedented times but despite the worst of the pandemic seemingly behind us, we are now facing an economic climate that will impact the day-to-day lives of households up and down the country. With inflation now at his highest since before the days that the internet was widely available and higher interest rates looking highly likely, many people will be feeling a financial squeeze like never before.

“Our research shows that people are worried about the pressure on their purse strings from all angles, with a high number concerned about tax rises impacting their take home pay while soaring interest rates will increase repayments on any debt, including a mortgage. It is unsurprising that the top financial priority for 2022 is paying for basic living expenses. It’s never been more important, regardless of situation, to make a realistic financial plan for both the short and long-term. Doing so can help with budgeting for immediate and future goals.”