What last week’s rate hike means for you
The Bank of England has raised interest rates again in a bid to control inflation. Rates are now at four per cent, up 0.5 percentage points and at a 14-year high.
But some experts believe that rates may now rise more slowly than had previously been expected, which could be good news for borrowers and not-so-good news for savers. Here’s what is going on.
Where is the Bank Rate now?
The Bank of England base rate is the rate that Britain’s central bank charges to other lenders when they borrow money. Because of that it has a knock-on effect on the rates charged to the public.
It is now at four per cent, which is a 14-year high, and banks have followed suit when it comes to raising the borrowing rates on tracker mortgages. They have been slower to raise savings rates, and the cost of new fixed mortgage deals has recently fallen, because they are priced based on market expectations of what rates will do in the future.
What will happen to Bank Rate next?
This is unlikely to be the final rate rise. One of the Bank of England Monetary Policy Committee members, responsible for setting rates, said this week that they will probably rise again. Catherine Mann told conference goers in Budapest that the next move was “still more likely to be another hike than a cut or hold”1.
However, rates may not rise as far as had been expected a few months back, with markets expecting them to peak at 4.5 per cent, a figure recently backed up by Bank of England governor Andrew Bailey2.
After this, rates could fall back to an extent, although are unlikely to go back to the ultra-low levels seen during the Covid-19 pandemic and financial crisis.
What does this mean for me?
Higher Bank Rate means that your mortgage is likely to cost more if you are on a tracker deal or your lender’s standard variable rate. For someone with £250,000 of borrowing, the 0.5 per cent rise means an extra £72 a month on mortgage payments.
If you are coming to the end of a fixed rate mortgage deal you are unlikely to be able to find a deal at as good a rate as before.
However, mortgage fixed rates have actually been falling in recent months, as mentioned above, so the increase may not be as drastic as you think. It’s now possible to get a fixed rate mortgage at under five per cent, where the average was 5.8 per cent at the end of 20223.
If you are a saver, the news is better as you will receive higher rates on your savings. However, this is more likely if you shop around, as banks do not always pass on their best rates to existing customers.
What should I do now?
Shop around for the best savings rates, as mentioned above. Many of the lesser known challenger banks have higher rates, and you can search on Moneyfacts to compare what is available. You have the same level of protection from the government from any bank with a UK banking licence, so do not worry if you are saving with a bank that you do not know. Just check you are protected using the Financial Services Compensation Scheme tool for extra peace of mind.
If you are getting higher rates of return it is also more important to use ISAs and pensions to prevent paying unnecessary tax on your savings. Everyone can make a certain amount of money from bank interest without paying tax, but higher rate taxpayers can only earn £500, and basic rate taxpayers £1,000. If you think you might end up earning more than this on savings, then these tax-free wrappers are invaluable.
Talk to a mortgage broker if your mortgage is coming up for renewal. While deals are changing all the time they will be able to advise you on whether to reserve a deal now or whether to wait and see if rates come down. In some cases you may be able to reserve a deal in advance and then change your mind later if rates come down, but you will need to check the terms very carefully with an expert.