The Bank of England has responded to the likelihood that the war in Ukraine will push inflation to around 10% this year by raising interest rates back to the pre-pandemic level of 0.75%. The base rate, which affects the costs of mortgages and the amount of interest paid on savings, has now risen three times since December.
The Bank of England’s Monetary Policy Committee (MPC) has voted by a majority of 8-1 to increase the base rate by 0.25 percentage points. The MPC meets eight times a year to set the base rate, and the results of the next meeting will be published on 5 May.
The base rate is used by the central bank to charge other banks and lenders when they borrow money, therefore influencing what borrowers pay and savers earn. So, these base rate rises will affect most mortgages unless they are fixed.
Continue reading to see how the new UK base rate could impact your mortgage or savings.
The base rate is the rate that the Bank of England charges other banks and other lenders when they borrow money.
The base rate influences the interest rates that many lenders charge for mortgages, loans and other types of credit they offer people.
When the Bank of England lends money to commercial banks, the amount of interest they must pay back is determined by the base rate. The higher the base rate is, the more lenders are charged – and these higher costs are often passed onto customers in the form of interest rate rises.
So, theoretically, a higher base rate should mean mortgages get more expensive and that savings accounts pay more interest on your money – but that isn’t always the case.
How the base rate change affects your mortgage will depend on the type of mortgage you have. The key points for mortgage holders are:
The vast majority of homeowners in the UK have a fixed-rate mortgage, so for most, nothing will change as a result of the base rate rise.
A fixed-rate mortgage means the rate will stay the same for a set period – usually two or five years. So, if you have a fixed-rate mortgage, you won’t immediately be affected by the base rate change and will instead continue to pay the same amount until the end of your fixed term.
When you come to remortgage, however, you might find that the deals have become a little more pricey.
Unlike fixed-rate deals, tracker mortgages follow the base rate plus a set margin – such as, the base rate plus 1%. If you have a tracker mortgage, your rate will increase by 0.25% immediately.
Discount mortgages work slightly differently – they provide a discount on your lender’s standard variable rate (SVR), such as the SVR minus 1%. If you have a discount mortgage, your repayments won’t go up straight away due to the base rate rise, but it’s likely that your lender will increase its SVR by some or all of the rise in the coming days or weeks.
In the second half of last year, mortgage rates fell significantly as lenders battled to secure custom from borrowers with large deposits. At one point, more than 100 sub-1% mortgages were available – but in the past few months, these have vanished amid growing rumours that base rate rises were on the horizon.
Since December, when the base rate first increased, mortgage rates for borrowers with big deposits have risen considerably. But there has been relatively minimal impact on the cost of 90% and 95% mortgages.
It is unlikely that the announcement of the base rate rise will result in the cost of fixed-rate mortgages soaring, as lenders will have already pushed their prices up in expectation of a base rate hike.
What you should do to cope with the rising base rate will depend on what sort of mortgage you have now and whether you’re close to the end of your initial mortgage term.
If you’re on a fixed-rate mortgage, nothing will change with your existing deal. However, any new deal you remortgage to in the future could now be more expensive. So, if you’re close to the end of your current term, you might want to search for a new mortgage deal now.
If you have six months or longer left of your fixed rate, you’ll either need to wait for your initial deal term to run out, or pay the charge to leave early.
If you’re on an SVR or ‘discount’ mortgage, you’re free to remortgage to a new deal at any time. It is definitely worth checking if you can because SVRs tend to be pretty pricey.
Similarly, if you’re on a discount mortgage, you may be able to remortgage without any penalty. If not, you’ll either need to wait for your initial deal term to run out, or pay the charge to leave early.
While the sub-1% mortgage rates that made the headlines last summer are a thing of the past, new lending is still being done at rates that are historically low. However, there are rumours that this will soon end.
Currently, though, there remains a huge gap between the cost of new mortgage deals and lenders’ SVRs. So, anyone who is already paying a variable rate should think about switching.
The base rate increase could affect all kinds of savings accounts. In general, savers benefit from base rate rises.
Recent years have made it tough for savers, with rates on instant access and fixed-term accounts plummeting. Many savers may be thinking that the base rate rise will bring an end to this. Unfortunately, however, there’s no guarantee that the announcement will offer an immediate boost.
The two recent base rate rises since December have had little impact on savings rates, with some of the top rates actually falling rather than rising. Unlike mortgage rate rises, most major providers are still deciding what to do with their savings rates. This most recent increase will place further pressure on banks to offer better rates to savers, though.
Whatever rate you’re currently on, it might be worth waiting a few days to see if best-buy rates improve before switching.