The Bank of England (BoE) announced this morning it was increasing its Base Rate from the low of 0.1% which it set at the beginning of the pandemic to help with the economic recovery from Covid.
There had been speculation the BoE’s Monetary Policy Committee (MPC) would raise the rate slightly to help counter the effects of rising inflation, which yesterday hit 5.1%.
However, there had also been rumours the Omicron variant might have changed the BoE’s view on making any immediate rate rises.
So today’s decision to go ahead with the increase has come as a surprise to many.
The increase in the base rate will mean mortgage borrowers who are on tracker mortgages which rise and fall in line with the Base Rate will see increases in their interest rate.
So too will borrowers who are on their bank’s Standard Variable Rate (SVR) or reversion rate. These homeowners are being urged to switch to a new deal to ensure they are not further impacted by today’s rate hike.
Rachel Springall, finance expert at Moneyfacts.co.uk, explained when borrowers may see the changes to their repayments. She said: “Mortgage rate competition has been rife this year, so while there has been a rise to bank base rate, this would typically be passed on to revert rates and base rate tracker deals.
“Fixed mortgage rates have risen slightly since last month, but lenders are still fighting for new business and borrowers could stand to make a substantial saving by moving off a variable revert rate to a fixed rate.
“Borrowers sitting on their standard variable rate (SVR) may see their rate rise within a month or perhaps within the next three months, depending on their lender.
“The difference between the average two-year fixed mortgage rate and SVR stands at 2.06%, and the cost savings to switch from 4.40% to 2.34% is a difference of £5,250 over two years approximately.
“A rise of 0.15% on the current SVR of 4.40% would add £408 approximately onto monthly repayments over two years.”
Hope for deposit savers?
The news of the Base Rate increase may offer a glimmer of hope to those saving for their deposit. But Rachel said savers may have take responsibility themselves if they wished to make any gains on their returns.
She said: “This base rate change may take a few months to trickle down to savers who have a variable rate deal, but there is also no guarantee the rate will be passed onto them in full, or at all.
“Should savers see 0.15% passed onto them, it would mean receiving £30 more a year in interest based on a £20,000 investment.
“It remains the case that savers need to act swiftly to take advantage of the best deals and, as some easy access accounts pay as little as 0.01%, hopefully this base rate rise will shake any saver’s apathy to look elsewhere.”
Fixed rate customers
Borrowers who are on a fixed rate deal will remain sheltered from any rate rises until it is time to remortgage.
It is thought around three quarters of borrowers have fixed rates and therefore won’t be immediately impacted by today’s hike.
However, with experts speculating this rise could be first of many increases, borrowers on fixed rates are being urged to stay vigilant, particularly as they approach the end of their deal.
Meanwhile those about to remortgage are being encouraged to consider the benefits of longer-term fixed rates such as five-year deals.
Nicky Stevenson, managing director at national estate agent group Fine & Country, said: “The real significance of this rise surrounds whether it marks a genuine change in direction for the Bank of England but that won’t be known for some time.
“The pace and frequency of rate rises is the big unknown but this move will focus the minds of borrowers on extending the length of the fixed rate deals they lock into.
“The markets are currently pricing in further increases to around o1% before the end of next year. This is unlikely to knock the housing market completely off balance.”
Borrowers who are thinking of switching or would like more advice on locking into a longer-term deal should speak to a broker.
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