The Bank of England has increased interest rates to 0.75% in an attempt to tackle rising inflation in the UK. That means the base rate is back to its pre-pandemic level. What does it mean for UK savers and borrowers?
Will my mortgage go up?
Only if you have a variable rate mortgage – typically a tracker that follows the base rate, or a loan on a lender’s standard variable rate.
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 costing 2.25%, the interest rate would rise to 2.5%, adding £18 a month to a £150,000 mortgage arranged over 20 years.
Some lenders move borrowers on to rates explicitly linked to the base rate when their fixed-rates come to an end. Santander, for example, has what it calls a follow-on-rate that borrowers who took out deals since 23 January 2018 move to at the end of their special offer. At the start of this month it went from 3.50% to 3.75% following February’s base rate rise, and it is now set to hit 4%. This means since the start of December the monthly repayments on a £150,000 mortgage over 20 years have gone up from £858 to £909.
On a standard variable rate things are less straightforward – these can change at the lender’s discretion. Not all lenders passed on December’s increase, although they did move with February’s rise. Some, such as Nationwide and Halifax, have passed on both previous increases in full.
There is no reason for banks and building societies not to pass on the full increase, says David Hollingworth of the broker L&C Mortgages. “It makes sense for borrowers to prepare for an increase in line with base rate,” he says.
Most borrowers are, however, on fixed-rate mortgages and their repayments will not change. Interest rates have been so low in recent years that locking in has been attractive, and since 2019, 96% of new mortgages for owner-occupiers have been taken on fixed rates. In total, 74% of outstanding mortgages are fixed.
Several million homeowners are now unmortgaged, thanks to years of low rates and enforced saving during lockdowns.
What about new mortgages?
The sub-1% mortgage rates that made the headlines last summer are a thing of the past, but new lending is still being done at rates that are historically low. However, some commentators think this will end soon.
Andrew Wishart, a UK economist at Capital Economics, says lenders have absorbed the previous base rate rises into their profit margins, but he does not think there is scope for them to do more. “We expect a sharp rise in mortgage rates over the next 12 months,” he says. “Based on our forecast that Bank Rate will rise to 1.25% by year-end and to 2.00% in 2023, the average rate on new mortgages is set to double from a low of 1.5% in November 2021 to almost 3.0% in 2023.”
That would cause “demand and house price growth to slow to a crawl”, he says.
Currently, though, there is a big gap between the cost of new deals and lenders’ SVRs so anyone who is paying a variable rate should consider moving. “Those borrowers who switch to a competitive fixed rate from a SVR could reduce their mortgage repayments significantly,” says Rachel Springall of the data firm Moneyfacts. She says on a £200,000 mortgage arranged over 25 years, moving from an SVR of 4.61% to the average two-year fixed rate of 2.65% would save a borrower about £5,082 over two years.
What about my other borrowing?
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.
What about my savings?
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%.
Account providers are at liberty to do what they want with rates, so Thursday’s announcement will not necessarily translate to rises across the board. Springall says not one of the biggest high-street banks has passed on the last two base rate increases to savers with an easy access account.
“As we have seen time and time again, there is no guarantee savings providers will boost their rates because of a Bank of England rate rise and even if they do it could take a few months to trickle through to customers,” says Springall. “The top rate tables are experiencing a positive uplift and there is hope that rates will continue to rise, however, we may not see pre-pandemic [savings account] interest rates for some time yet.”
Anna Bowes from the website Savings Champion says only 64 of the 158 banks or building societies have announced any changes to some of their savings accounts since the December base rate increase. She says only 33% of all existing variable rate savings accounts have increased by something, but just 2.3% by the full 0.4% increases of December and February.
Will it have any other impact on my finances?
If you have a private pension and want to buy an annuity to provide an income in retirement you could benefit from the increase. Annuity providers invest in government bonds and these are expensive when rates are low as other investors want to hold them. When rates rise those other investors are inclined to sell the bonds, which makes them cheaper. As a result, annuity providers are able to offer better returns.
Annuity rates have already been rising and a rate rise could help those who are about to retire.