The 0.5% rise was implemented as part of continued attempts to curb inflation which remained at 8.7% in May – the same as April – and well above the 2% target.
But this substantial hike – the 13th consecutive increase to the base rate – will be huge blow to borrowers, especially those about to remortgage from a fixed rate or those on tracker or variable deals.
Steve Seal, CEO, of specialist lender Bluestone Mortgages, said: “With many lenders repricing or withdrawing products from the market altogether, the outlook for would-be and existing borrowers remains subdued.
“For those individuals struggling amid this tough economic landscape know that there is support available.
“Whether they are struggling to keep up with their mortgage payments or aiming to take their first steps onto the property ladder, it is critical to contact their lender as soon as possible or seek advice from a mortgage broker who can walk them through the options available.
“As an industry, it is our duty to signpost these customers to the right support and ensure that their dream of homeownership can live on.”
Why have rates been raised by so much?
Today’s base rate rise has been widely predicted and comes as lenders withdraw and reprice mortgages in anticipation of the decision. Just this week the average two-year mortgage rate soared past 6%.
But until yesterday’s inflation data had been released, a more modest 0.25% rise had been expected. Last time rates were raised by 0.5% was in February.
The nine members of the Bank of England’s (BoE) monetary policy committee – which makes the decisions regarding interest rates – were divided 7-2 in favour of the 0.5% rise. The remaining two preferred no change.
Alice Haine, personal finance analyst at BestInvest, said the split decision showed the difficult balancing act the bank is facing.
She added: “It’s the size of the interest rate increase that is significant, as the BoE’s decision to push ahead with a 50-basis point increase, taking the headline rate to 5%, means it is taking a more aggressive stance towards tackling high inflation despite the devasting effect this could have on mortgage borrowers.”
She added: “Let’s hope this is not a case of unlucky number 13 with the move likely to exacerbate the panic already gripping Britain’s mortgage market.
“Thirteen rate rises in a row since December 2021 are hard to absorb for even the most robust household budgets – with the latest BoE decision marking the first half-point rate rise since February.”
How the 0.5% hike to the base rate will impact you?
If you are on a fixed-rate mortgage which is not due to expire in the near future you will not be directly impacted by today’s decision. Keep an eye out for future rate rises and if you are concerned about repayments in the longer term future, consider making overpayments now to bring down your current loan.
If you are due to remortgage soon the advice from experts is to get advice from a broker to help you find the best deal.
Haine said: “Mortgage holders whose deals expire in the next six months could consider locking in a deal now, before interest rates rise any further.
“If mortgage rates improve in the coming months, they can then switch to a better product – but better to be prepared for all eventualities.”
If you are on a tracker mortgage your rate will increase now in line with the 0.5% rise. For those on a variable rate mortgage, it’s likely this rise will be passed on.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Despite rising fixed rates, it’s still worth considering a switch from a Standard Variable Rate (SVR) for more peace of mind to guarantee the monthly mortgage payments, as the average SVR has risen to its highest point in over 15 years.
“A rate rise of 0.50% on the current average SVR of 7.52% would add approximately £1,576 onto total repayments over two years.”
For anyone concerned today’s rise in rates will cause any problems with repayments they should speak to their lender. You can find out more information here about what options your lender can offer you if you cannot afford repayments.
If you are first-time buyer the idea of entering the property market may feel more daunting than normal. But some experts believe this current situation could provide opportunities for you. Check out this article which includes advice (scroll down to the end) for FTBs.
