What the interest rate changes mean for you

The Bank of England raised the Bank Rate by 0.75 percentage points this week, in an attempt to control inflation.

We now have the highest base interest rate for 14 years, which will affect all aspects of our financial lives.

Here’s what the change might mean for you.

If you have a mortgage

If you own your home with a mortgage, you might find that your monthly payments begin to rise. Some borrowers are on variable rates- either tracker mortgages or your lender’s Standard Variable Rate (the rate you go onto when a mortgage deal ends). These will change almost immediately.

If you had a £250,000 mortgage on the average SVR of 5.4 per cent (Moneyfacts figures) the full rate rise being passed on would push your interest rates up to 6.15 per cent. You would be paying £123 a month more for your mortgage, at £1683.

If your rate is fixed, then repayments will not change immediately. Instead, you may find that it is more expensive to remortgage your home when your current deal comes to an end.

What will happen next?

The mortgage rate may go even higher. The market had previously been pricing in a rise to 5.2 per cent – though the most recent comments from the Bank of England suggest it may peak below this.1

Because mortgage companies are expecting Bank Rate to rise, fixed rate mortgages will remain more expensive than they have been in recent years.

What can I do about my mortgage?

If you are on a variable rate for your mortgage, it may be sensible to shop around for a better deal. This may be a fixed rate – particularly if you cannot afford not to know the exact level of your repayments – or a tracker rate, which may be cheaper in the short-term, if you believe that rates will peak at a lower level than expected, and you can afford the uncertainty.

Talking to a mortgage broker could help you to find the best value deal for you. It is worth considering whether you could bring the cost of your mortgage payments down using savings, particularly if paying off some of your mortgage with savings takes you into a higher loan-to-value bracket, which means that the rates available to you could be more competitive.

If you are paying a high rate on your current mortgage, you may want to see if you can reduce the amount of interest you pay by making overpayments into your mortgage. There are often restrictions on the amount you can overpay, but many lenders allow you to overpay by 10 per cent of the balance without penalty. This could save you lots in interest and ensure you pay your mortgage off earlier.

If you have savings

Those with savings are doing better from the Bank Rate rise, as many banks and building societies have put cash rates up. However, many have not passed on the full increase, and it is sensible to check that your money is earning as much as possible.

Check moneyfacts.co.uk for a list of the best-paying accounts. The best rates are usually available to those who want to lock their money up for longer.

With savings rates higher than previously it may be worth working out whether you can use your ISA allowance. Higher-rate taxpayers can make £500 of savings interest before paying tax on it, but it is far easier to hit this level now that savings rates are higher.

When will rates come down?

Although Bank Rate has risen, fixed mortgage rates have already come down from a peak caused by the volatility following Truss and Kwarteng’s mini-Budget a few weeks back. They may have a little further to fall.

Moneyfacts, the financial data group, said that they peaked on October 20 at 6.65 per cent and had fallen to 6.46 per cent this week.

However, it may be some time before we see very low interest rates again. Inflation is not likely to start falling until the middle of next year, but the Bank of England says that when it does it will fall sharply.2 When it does, it may give more leeway with rates, but until then they are likely to remain on the higher side.

8th November 2022

1 https://www.reuters.com/markets/europe/bank-england-makes-historic-rate-hike-despite-very-challenging-outlook-2022-11-03/
2 https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising