The Bank of England has just raised interest rates. What does that mean for your mortgage?
The Bank of England’s decision to raise the base rate by 0.25 of a percentage point is likely to affect millions of people – both mortgage-holders and savers.
A hike in the rate had long been forecast, but when earlier this week figures showed a surprise increase in inflation last month, that seemed to cement the judgment.
The 11th consecutive increase in a row by members of the Monetary Policy Committee brings the Bank’s base rate to 4.25 per cent, its highest level since October 2008.
It’s estimated up to four million households will face higher monthly home loan repayments this year.
Those borrowers might well be worried about how the rise might affect them, especially in view of the cost-of-living crisis that has sent household bills soaring.
And savers will also wonder whether they can maximise their cash for the same reasons.
Most banks and building societies will raise their rates in the coming days and weeks, often putting up mortgage rates more quickly than their interest rates on savings.
Borrowers already on fixed-term deals will be unaffected for now as their interest rate cannot change before the end of their fixed period.
For those with variable rate mortgages, changes often take effect immediately, being reflected in their next monthly mortgage repayment.
Usually the increase in rates will reflect the base rate rise, but some lenders may choose to hike them by more.
About 750,000 standard variable rate customers will face £182 a year in extra costs, according to banking trade body UK Finance.
People with tracker mortgages, which follow the base rate, usually at a set amount above it, are also set to face higher payments with immediate effect.
UK Finance says around 640,000 home loan borrowers on tracker products face paying an average of £285 a year extra.
Borrowers and would-be property buyers can easily find out how much extra any given interest rate rise will cost them, using online calculators such as that on the government’s Moneyhelper website and Citizens’ Advice in England and in Scotland.
It shows that for someone with £250,000 still outstanding on their property, repaying over 20 years, monthly payments will rise from £1,938 to £1,975 if their variable rate mortgage goes up from 7 per cent to 7.25 per cent.
According to experts at Moneyfacts, a rate rise of 0.25 percentage points on the current average standard variable rate of 7.12 per cent would add about £772 onto total repayments over two years on a £200,000 25-year loan.
Experts say that for anyone with a variable rate loan, now might be a good time to opt for a fix, because the average fixed-rate mortgage cost is at its lowest in six months but the base rate could yet rise again this year.
A typical two-year fixed rate mortgage is now 5.32 per cent, and the average five-year fixed rate deal is 5 per cent, Moneyfacts says.
Jonathan Gordon, director of property investment company IP Global, said the base rate rise was likely to put a further squeeze on the already overheated UK rental market, pushing up rents, while savers were likely to postpone buying.
“It’s a blow for tenants as much as it is for many borrowers,” he said.
The base rate rise offers hope for savers of slightly higher returns, although cash savings are still being eroded in real terms by high inflation.
Not all savings providers will pass on the rise, so savers are advised to shop around.
Moneyfacts says that challenger banks and building societies are offering some of the best returns, but most big high street brands pay a paltry less than 1 per cent AER.
Moneysavingexpert advises savers to wait a few days before switching a few days to see whether best-buy rates improve before switching. Some providers will not raise savings rates as they have already been factored in.
The next interest rate announcement will be on 11 May.
Julian Jessop, an economics fellow at the Institute of Economic Affairs, said: “Whether interest rates are raised again will depend mainly on the labour market and price data between now and the next meeting, and on the extra analysis in the May Monetary Policy Report.”