Interest Rate Hike
The Bank of England has increased the Bank Rate by 0.25 percentage points, taking it to 5.25%, the highest level in 15 years. This is not a surprise move; rather, it’s the 14th time the rate has gone up since December 2021, when it was at an all-time low of 0.1%.
Impact on Mortgages
For homeowners, this means changes in the monthly payments for mortgages. If you have a variable rate or tracker mortgage, your monthly payment will likely increase. On an average mortgage balance of £220,000, expect to pay an extra £15 or £24 a month, depending on your mortgage type.
If you’re on a fixed-rate mortgage, you might see even bigger changes when your current deal ends. New two-year fixed rates are between 6.5% and 7%, potentially a full 5 percentage points more than previous rates.
There are around 800,000 fixed-rate deals ending in the second half of 2023, and another 1.6 million due to end in 2024, so many people will be affected by these changes.
The Reason Behind the Increase
Why is this happening? The Bank of England is trying to control inflation, which measures how prices are rising in the economy. The goal is to keep inflation around 2%, but right now, it’s at 7.9%. By raising interest rates, the Bank hopes to slow down spending and bring inflation back under control.
Some thought the Bank might raise rates by 0.5 percentage points to 5.5%. However, since inflation fell sharply recently, the Bank decided on a smaller increase. They aim to bring inflation down to 5% by the end of 2023 and reach their target by mid-2025.
The next Bank Rate decision will be on September 21, and further changes may come later in the year.
Banks Respond, Savers Lose
Because inflation is slowing down, banks have begun to reduce mortgage rates slightly, providing a bit of relief for homeowners. However, savers might find themselves on the losing end, as this marks the end of the steady increase in savings rates seen over the past year and a half. Experts advise acting quickly if considering locking into a fixed-rate deal before rates drop further.
The Bank of England’s decision to raise interest rates impacts borrowers and savers alike. While this move is aimed at controlling inflation, it means mixed news for consumers. Homeowners with variable or tracker mortgages will see immediate changes, and those on fixed rates should prepare for potential increases when their deals end. Savers, meanwhile, may need to reconsider their strategies in light of these changes.