Last week, the Bank of England raised interest rates to 0.75%. It is the highest level that rates have been since 2009 and the increase is set to have an impact on millions of borrowers with a variable or tracker rate mortgage.
The hike is only the third change in interest rates in the last decade. Keep reading to find out why rates have increased and how the Base rate rise will affect you.
Why has the Base rate gone up?
The MPC has raised the Base rate to 0.75%, the highest level since they fell to 0.5% in March 2009 on the back of the global financial crisis and recession.
The Bank of England Monetary Policy Committee (MPC) had been expected to raise interest rates three months ago, however chose not to hike rates as the economy stumbled through a weak patch in the spring.
The Bank now believes that the dip was temporary, and that economic growth will recover to 0.4% in the second quarter and maintain that pace later in the year.
Mark Carney, the Bank’s governor, told businesses and households that there would be further increases in borrowing costs if economy continued to recover from the softer patch earlier this year. However, he also signalled willingness to reverse the quarter-point increase in the event of a disorderly Brexit.
“If there is a major shift [in the Brexit talks]... then that could have consequences for monetary policy,” he said. “We can adjust when necessary.”
Some commentators believe that the rate increase has come too soon. The Institute of Directors said the Bank had "jumped the gun" adding: "The rise threatens to dampen consumer and business confidence at an already fragile time.
"Growth has remained subdued, and the recent partial rebound is the least that could be expected after the lack of progress in the year's first quarter."
John McDonnell, the shadow chancellor, said the rate rise would be bad news for hard-pressed households: “Given recent revelations that households are spending more than they receive in income for the first time since 1988, today’s rise will be a blow to those facing high levels of personal debt.”
How will the Base rate change affect my mortgage?
If you have a fixed-rate mortgage, then the Base rate increase won’t affect your repayments.
In recent years, most borrowers have chosen fixed-rate deals, with the Guardian reporting that the proportion of borrowers with variable mortgages – which move up and down in price as the Base rate changes – has fallen to only 35% compared with 70% in 2001.
If you have a tracker rate mortgage, then your payments will rise over the next couple of months. Lenders including HSBC, Lloyds Banking Group, RBS and Virgin Money have already confirmed that interest rates on their tracker mortgage products will rise by 0.25%.
If you do have a tracker mortgage, an extra 0.25% on your interest rate will add £12 a month to a £100,000 repayment mortgage and £25 a month to a £200,000 loan.
For the 400,000 households on Nationwide’s base mortgage rate, their monthly bill will rise from £449 to £461 (on a loan size of £100,000) and from £897 to £922 on a £200,000 loan.
If you have a mortgage that is linked to your lender’s Standard Variable Rate (SVR), then your repayments may also rise. Barclays have already confirmed that their variable rate mortgages will rise by 0.24% from 1 September and other lenders are expected to follow suit.
How the Base rate rise affects other borrowing and savings
Now interest rates have risen, the cost of unsecured debt will also rise, and personal loans are likely to become more expensive.
The Independent reports that “with millions of consumers now relying on taking on debt to fund basic spending, a rate rise is likely to hurt economic growth, with retailers potentially the first to be hit hard.”
While the hike may see higher repayments for borrowers, a rate rise is good news for savers. Rates on savings accounts are likely to increase, but you may have to wait to see improved rates.
In addition, banks have historically been notoriously bad at passing on increases to customers. For example, the Bank of England raised rates by 0.25% in November but the average rate on an easy access account went up just 0.07% between September 2017 and July 2018.
Will the Base rate go up again?
On announcing the rate rise, the Bank of England suggested that the next rate rise might not be until 2019 at the earliest. In addition, the Bank said that any future increases in the cost of borrowing are likely to come at a “gradual pace and to a limited extent.”
City analysts don’t expect a return to the 5% base rates common before the financial crash. Most suggest a “new normal” base rate of no more than 2% to 3% – and even then that level of rates is unlikely for some time to come.
Any rise in interest rates could have a damaging effect on the UK economy. The Office for National Statistics (ONS) recently reported that UK households spent £900 more than they received in income in 2017, the worst figures on record.
If the Bank of England raises the base rate by another 1.5%, then customers on Nationwide’s main mortgage deal will see the cost of a £200,000 loan increase by £158 a month to £1,055. That would create a big problem for the finances of many families, which is why the Bank of England are unlikely to raise interest rates by that amount.