The hike means borrowers on variable mortgages will see an increase to their repayments whilst those on fixed rates will be protected from the hikes until the end of their deal.
Some experts are warning this rise in interest rates, introduced in an attempt to bring inflation back down from 7% to the target of 2%, would push people to their financial limits.
However, others are attempting to reassure homeowners that although rates had increased, they were still relatively low.
Alice Haine, personal finance analyst at investing platform Bestinvest, said “While mortgage rates will rise, the cost of borrowing is still historically low, so there’s no need to go into full panic mode yet.
“Yes, most lenders will pass the rate rise onto borrowers, but with interest rates still very much on the low side, the increase in percentage terms is modest.”
However, she admitted, with living costs being so high, this did add extra pressure: “This might not have been an issue in a normal economic climate, but in the current cost-of-living crisis every pound matters as households struggle to balance the books.”
James Andrews, senior personal finance editor at money.co.uk, said the Bank of England’s (BoE) decision would either be ‘incredibly damaging’ or ‘woefully foresighted’ depending on how the next few months pan out.
“One thing we can say for certain,” he added, “is that it will do almost nothing to bring down the cost of living for households across the UK – which is being driven by global energy prices and supply chain issues.
“Another thing we can say for certain is that it will make borrowing more expensive at a time when more and more people are being forced into debt to meet rising bills.
“We can also say with some certainty that it will put downward pressure on house prices – making mortgages more expensive at a time that rising essential bills make them less affordable too.”
What does the rise mean for borrowers with variable mortgage?
If you are in one of the 1.1 million people with a standard variable rate (SVR) mortgage or the 850,000 with a tracker you will most likely see your mortgage rate rise.
For those on an SVR, your lender will need to adjust the rate accordingly and while they are under no obligation to do so, most – it is expected – will pass on this latest hike.
Indeed, Sarah Coles senior personal finance analyst at Hargreaves Lansdown, was confident variable borrowers would see a difference soon. “Banks will be falling over themselves to pass on the rise to variable rate mortgage customers before the ink dries on the Bank of England announcement,” she said.
For those on a tracker deal, which tracks the BoE base rate, you’ll see an immediate increase in your repayments.
Sarah calculated someone with a £300,000, 25-year, repayment mortgage on the average SVR could see their monthly payments go up by over £40 a month.
She said whilst this in isolation this didn’t sound like an impossible stretch, the steady ratcheting up of rates since December would be taking its toll.
The advice to anyone on their lender’s standard variable rate (SVR) is to remortgage – if they can – to a fixed-rate deal which will ensure they are protected from future rate rises.
Alice Haine said: “By securing a fixed deal now, this will reduce anxiety further down the line as the monthly payment will be set.”
How will the interest rate rise affect my fixed rate?
Fortunately, the majority – three quarters – of mortgage holders are on a fixed-rate mortgage where the interest remains the same for the duration of the deal.
This means, at the moment, there will be no changes to their repayments. Fixed rate customers may, however, notice a difference when their mortgage expires and they come to remortgage.
It’s useful to know, if your mortgage is due to expire this year, a mortgage offer is valid for six months. So it could be worth looking at locking into a lower rate now, before there are more BoE hikes.
Alice said: “Shopping around now for a deal might also be wise for those on a fixed-rate deal with a 2022 expiry date or those looking to remortgage, as mortgage offers are often valid for a number of months. This will protect them from the effect of further hikes and help to avoid a financial shock.”
Is there any advantage to interest rates increasing?
Savers are obviously the main beneficiaries of interest rate rises. If their bank or savings provider pass on the hike they will enjoy better rates.
Indeed, data out this week from Moneyfacts.co.uk, suggested some savings rates had started to increase recently – which is great news for anyone saving for the deposit for their first home.
The problem is, with the previous interest rate hikes, providers haven’t been as forthcoming about hiking savings rates as lenders have about increasing mortgage rates. What’s more, high inflation erodes the power of savings rates. So, things are not as healthy as they could be in the savings market.
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Why are interest rates going up?
This is the fourth increase to the BoE base rate in a row and it means interest rates are at their highest level since February 2009, at the height of the global financial crisis.
Today, the BoE’s Monetary Policy Committee voted 6-3 vote in favour of the quarter point hike (the three wanted a larger rise to 1.25%). They were attempting to reduce inflation back down towards its 2% target in the medium-term.
Alice said: “Any decision to increase rates has to be approached very carefully, with Bank Governor Andrew Bailey needing to address not just the toxic mix of slowing growth and high inflation – known as stagflation – but also the struggles faced by consumers during the cost-of-living crisis.”
Whilst there is a theory hiking rates reduces inflation, not everyone is convinced putting up the cost of borrowing is a solution.
James Andrews said the manoeuvre could go one of two ways: “If the Bank is proved right, then action now will stop wage rises turning this year’s high inflation into a permanent feature of the economy,” he said.
“But if they’re wrong, they’ll simply accelerate the UK’s path into recession and a possible house price crash, all the while making the current cost of living crisis even worse for people struggling with debts.”
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