The Bank of England has voted to raise interest rates by 0.25 percentage points to 1.25% as the UK grapples with high inflation. We look at what that means for your finances.
The increase is only guaranteed to be passed on to borrowers with home loans that have rates explicitly linked to the Bank base rate. These are tracker mortgages, and some lenders’ rates for those who have finished a short-term deal. Santander, for example, has what it calls a follow-on rate for borrowers who have taken out deals since 23 January 2018. This is 3.25 percentage points above the base rate, so will move up to 4.5% after the latest announcement.
A tracker mortgage will directly follow the base rate – the small print of your mortgage will tell you how quickly the rise will be passed on, but next month your payments are likely to go up and the extra cost will fully reflect the base rate rise. On a tracker currently at 2.25%, the interest rate would rise to 2.5%, adding £18 a month to a £150,000 mortgage arranged over 20 years.
On a standard variable rate things are less straightforward – these can change at the lender’s discretion. Leeds building society has already announced it will not pass on the latest increase to borrowers on its SVR, and other mortgage providers could follow. Santander has said that customers on its old SVRs will face an increase at the start of August.
Most borrowers are on fixed-rate mortgages and their repayments will not change immediately. However, when they come to the end of their existing deal they may find they have to pay more for their next loan. The Guild of Property Professionals estimates that 1.5m fixed-rate mortgages will end this year.
According to the financial information firm Moneyfacts, the average cost of a two-year fixed-rate mortgage has risen from 2.59% last June to 3.25% today, while a five-year deal has gone from 2.82% to 3.37%. Last summer it was possible to fix below 1% if you had a big enough deposit, but now the cheapest loans offering certainty are all at rates above 2%.
Paul Broadhead, the head of mortgages at the Building Societies Association, says someone with a £130,000 mortgage coming to the end of a two-year fixed rate who remortgages to a new similar deal will probably pay up to £80 more a month. “For those on five-year fixed rates, their remortgage is likely to increase their payments by nearer £35 a month,” he says.
Warnings from the Bank that it could “act forcefully” in future could push up the rates further.
Loans and credit cards
Most personal loans are taken on fixed rates, as is most car financing, so if you have unsecured borrowing you should continue to repay it as agreed.
Credit card rates are variable, but not typically explicitly linked to the base rate, so won’t automatically go up, although they have been increasing in recent months.
Rates on new personal loans have been going up, according to the online comparison site Freedom Finance. It says the average rate for a £10,000 loan was 4.06% in May, its highest level since September 2016.
Sabya Mukherjee, the head of credit risk at the money app Monese, says: “As the base rate keeps increasing, cheap forms of credit could start to dry up in the market. For example, ‘0% balance transfer’ offers are likely to come under pressure. It could also become harder for some to access affordable finance.”
The housing market has been fuelled by cheap mortgages, so increases in the cost of borrowing are likely to have an impact. People taking on new mortgages will be able to borrow less, as lenders have strict affordability tests which take into account SVRs.
“Affordability calculations may be compromised, which could affect borrowing potential,” says Jeremy Leaf, a north London estate agent and a former Rics residential chairman. However, he suggests that while this will slow demand and the pace of house price growth it “won’t reduce prices, bearing in mind the continuing huge imbalance between supply and demand”.
Karen Noye, a mortgage expert at financial advisers Quilter, says this could be the start of a difficult period in the property market. “The housing market is already showing signs of a slowdown and how well it can weather further rate rises, alongside raging inflation, is yet to be seen, but the prognosis is not good,” she says.
Savers have been the losers from years of rate cuts, and when the base rate was cut to an all-time low of 0.1% in 2020 banks and building societies embarked on a new round of reductions. By last summer, many accounts were paying just 0.01%.
Following previous base rate increases, account providers have boosted some rates, although generally not in line with the Bank’s move.
On Thursday, Yorkshire building society said it would add up to 0.6% to accounts after the latest decision. It said savers with easy access accounts would now receive a minimum of 1.1% while those holding accounts with restricted access would get at least 1.15%. Leeds building society says it will pass on the full 0.25% on its regular saver and children’s accounts.
Santander has announced some increases, including a rise on the popular 123 current account – interest will go from 0.5% to 0.75%.
Even if the latest increase is passed on in full, savers are still seeing the value of their money being eroded by inflation.
Annuities – the products offering a guaranteed income in exchange for a lump sum – have become better value as interest rates have risen, and are likely to improve again, says Helen Morrissey, a senior pensions and retirement analyst at Hargreaves Lansdown. She says annuity rates hit an eight-year high this week: someone with a £100,000 pension could get £5,940 a year from an annuity, compared with just £4,495 back in 2016.
“The last time we saw rates this high was almost eight years ago and there’s every chance we will see incomes breach £6,000 in the coming weeks,” she says. Annuities have become unpopular since pension freedoms were brought in, but further increases in payouts could make them more attractive.
Private rents have been increasing, and if landlords face higher bills for their mortgages, they might pass these on when tenancies are reviewed. In common with the residential mortgage market, many landlords have locked into fixed-rate mortgages, but when they renew those deals they are likely to cost more. According to the buy-to-let broker Property Master, before today’s rise landlords were already facing paying £133 a month more on a typical mortgage if they moved to a new fixed-rate deal.