The Bank of England base rate rise – what it means for you

On Thursday, the Bank of England raised its base rate for the first time in 10 years. But amid all the headlines and financial jargon, what does this mean for the pound in your pocket – or in your bank account? The general rule is that a rise in interest rates is good news for savers – less so for mortgage holders, particularly those on variable or tracker mortgages. That’s not the full picture, however. Here’s what you need to know.

What is the base rate?

The Bank of England has a monetary committee that meets eight times a year to review the performance of the UK economy. If they feel it is overheating or underperforming, they can raise or lower the base rate – and this is important because banks use it as a guide for the interest rates they charge on mortgages or pay out on savings accounts. Some financial products are even directly linked to moves in the base rate (these are called base rate trackers).

Why has the base rate changed?

Although the economy is still relatively week, recent GDP figures have been slightly higher than expected. Also, there are concerns that the current low unemployment rate could lead to faster wage growth. Both of these factors could see a further rise in inflation so in an effort to control this, interest rates have been raised from 0.25% to 0.5%. It’s a small increase but it could directly affect many savers and homeowners. 

What does the base rate rise mean for my mortgage?

  • First-time buyers

If you’re a recent buyer, there is at the moment little cause for concern. According to the Council of Mortgage Lenders (CML), most first-time buyers are on two-, three- or five-year fixed deals so their payments won’t rise.

Those with a tracker loan based on the Bank of England base rate, however, will see their repayments rise by around £12-£20 a month. And those still looking to buy their first home may also be affected, as banks withdraw and replace current deals with higher priced ones. Some banks have already started doing this, so now is a good time to start shopping around.

  • Current homeowners

According to CML, 57% of UK homeowners are on fixed-rate mortgages and again they won’t be immediately affected. Any change in monthly payments for the 43% on tracker mortgages or SBV mortgages will depend on the deals they currently have with their provider, although in most cases an increase is likely.

  • Landlords and buy-to-let mortgages

Since many of these are interest-only mortgages, this is the area that is likely to see the biggest effect. If you have a repayment mortgage of £200,000 over a 25-year term, for example, the latest increase could see you paying an extra £44 per month. On an interest-only mortgage over a 25-year term, however, that rises to an extra £83 a month. 

Bank of England interest rates rise 2017

What does the base rate rise mean for my savings?

It’s good news – sort of. Since the financial crisis of 2008, savers have suffered as interest rates remained flat even as inflation has crept ahead. This has particularly affected those who live off their savings – generally retired people – and those who are trying to grow their savings, for example young people trying to scrape enough together for their first mortgage.

Theoretically even a modest rise in interest rates should see a better return on your savings but in the past banks have been noticeably slower to feed a rise in interest rates through to savers than they have been to increase charges on mortgage holders. Again, it pays to shop around.

However, ISAs have begun to inch slowly upwards. The average ISA now pays 1.02%. If that rises to 1.25%, someone with savings of around £10,000 will earn a return of £125 per year.  

Shakila Hashmi

Shakila Hashmi

Head of Money

 “While a rate rise may be good news for savers, for those on standard variable rate mortgages, this will be something of a hammer blow. Our research suggests that a rate rise of 0.25% could add £18 a month, or £216 a year, to the average standard variable rate mortgage. With around 3.9 million households on variable rate mortgages, this equates to £842 million in additional payments across the UK.

 Many households will really struggle if their bills increase by £200 and will also have the uncertainty of knowing exactly how much they will be paying each month as we enter a rate rising environment and the monthly meetings of the Bank of England will be watched with fear by millions. Standard variable mortgages also tend to be far more expensive than some short term fixed rate options, so fixing a deal now is a bit of a no brainer. Most variable rate mortgages allow you to change to more competitive deals without imposing a penalty or exit fee. With many lenders already starting to raise rates on their fixed rate mortgages as well, homeowners should consider switching now to lock in low rates before they increase any further.”

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