The Bank of England voted to raise interest rates by 0.25 percentage points to 1.25% as the UK struggles with high inflation. We take a look at what this means for your finances.
The increase is only guaranteed to be passed on to borrowers with home loans whose rates are explicitly linked to the Bank’s base rate. These are follow-up mortgages and rates from certain lenders for those who have entered into a short-term agreement. Santander, for example, has what it calls a tracking rate for borrowers who have entered into agreements since January 23, 2018. It’s 3.25 percentage points above the base rate, so it will increase to 4.5% after the last announcement.
A follow-on mortgage will directly track the base rate – the fine print on your mortgage will tell you how quickly the hike will pass through, but next month your payments will likely increase and the additional cost will fully reflect the base rate hike. On a tracker currently at 2.25%, the interest rate would rise to 2.5%, adding £18 a month to a £150,000 mortgage arranged for 20 years.
On a standard variable rate, things are less straightforward – they can change at the lender’s discretion. The Leeds building society has already announced that it will not pass on the latest increase to borrowers on its SVR, and other mortgage providers may follow suit. Santander said customers of its older SVRs will face an increase in early August.
Most borrowers have fixed rate mortgages and their repayments will not change immediately. However, when they come to the end of their existing contract, they may find that they have to pay more for their next loan. The Guild of Real Estate Professionals estimates that 1.5 million fixed rate mortgages will expire this year.
According to the financial information company Moneyfacts, the average cost of a two-year fixed-rate mortgage has fallen from 2.59% last June to 3.25% today, while a five-year contract went from 2.82% to 3.37%. Last summer it was possible to fix below 1% if you had a large enough deposit, but now the cheapest loans offering certainty are all at rates above 2%.
Paul Broadhead, head of mortgages at the Building Societies Association, said someone with a £130,000 mortgage coming to the end of a two-year fixed rate that pays off a similar new deal will likely pay up to £80 £ more per month. “For those on five-year fixed rates, their mortgage will likely increase their payments by almost £35 a month,” he says.
The Bank’s warnings that it may “act forcefully” in the future could drive rates higher.
Loans and credit cards
Most personal loans are fixed rate, just like most car financing, so if you have an unsecured loan, you must continue to pay it back as agreed.
Credit card rates are variable, but are generally not explicitly linked to the base rate, so they will not increase automatically, although they have increased in recent months.
Rates for new personal loans have gone up, according to online comparison site Freedom Finance. It says the average rate for a £10,000 loan was 4.06% in May, its highest level since September 2016.
Sabya Mukherjee, head of credit risk at money app Monese, said: “As the base rate continues to rise, cheap forms of credit may start to dry up in the market. For example, “0% balance transfer” offers may come under pressure. It could also become more difficult for some to access affordable finance.
The housing market has been fueled by cheap mortgages, so increases in the cost of borrowing are likely to have an impact. People taking out new mortgages will be able to borrow less because lenders have strict affordability tests that factor in SVRs.
“Affordability calculations can be compromised which could affect borrowing potential,” says Jeremy Leaf, a North London estate agent and former residential chairman of Rics. However, he suggests that while this will slow demand and the rate of house price growth, it “will not reduce prices, given the continuing huge imbalance between supply and demand”.
Karen Noye, mortgage expert at financial advisors Quilter, said it could be the start of tough times in the housing market. “The housing market is already showing signs of slowing down and it remains to be seen how well it can withstand further rate hikes alongside rampant inflation, but the prognosis is not good,” she said.
Savers were the losers of years of rate cuts, and when the base rate was cut to an all-time low of 0.1% in 2020, banks and building societies embarked on a new round discounts. Last summer, many accounts were only paying 0.01%.
Following previous base rate increases, account providers have raised some rates, although this is generally not in line with the Bank’s decision.
On Thursday, the Yorkshire building society said it would add up to 0.6% to the accounts after the latest decision. He said savers with easy access accounts would now receive a minimum of 1.1% while those with restricted access accounts would get at least 1.15%. The Leeds building society said it would pass on the full 0.25% to its usual savings and children’s accounts.
Santander has announced some increases, including a hike in the popular 123 checking account – interest will rise from 0.5% to 0.75%.
Even if the latest increase is fully passed on, savers still see the value of their money eroded by inflation.
Annuities – products that offer guaranteed income in exchange for a lump sum – have risen in value as interest rates have risen and are expected to improve further, says Helen Morrissey, senior pension and debt analyst. retired to Hargreaves Lansdown. She says annuity rates hit an eight-year high this week: someone with a £100,000 pension could get £5,940 a year from an annuity, up from just £4,495 in 2016.
“The last time we saw rates this high was almost eight years ago and there is every chance we will see incomes over £6,000 in the coming weeks,” she says . Annuities have become unpopular since the introduction of pension freedoms, but further increases in payouts could make them more attractive.
Private rents have risen, and if landlords face higher bills for their mortgages, they could pass them on when reviewing rentals. Similar to the residential mortgage market, many homeowners have switched to fixed rate mortgages, but when they renew these agreements they are likely to cost more. According to buy-to-let broker Property Master, before today’s hike, landlords already had to pay £133 more per month on a typical mortgage if they switched to a new fixed rate deal.