MILLIONS of households have been dealt a blow today as the Bank of England hiked interest rates for the seventh time in a row.
The Bank of England has hiked the base rate of interest to 2.25%.
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But the hike of 0.5% is less than expected giving dome relief to borrowers.
The Bank of England has raised interest rates to levels last seen in the financial crisis as it confirmed that the UK is already in recession.
Economists had expected a hike of 0.75% as the BoE tries to tackle high inflation.
Lifting interest rates is meant to encourage people to save, rather than spend, which in theory should help bring rampant inflation under control.
The central bank has already hiked the base rate six times this year.
It is an increase of the previous rate of 1.75%, and banks are set to pass the latest increase on to borrowers.
The move will make the cost of borrowing, including loans, credit cards and mortgage repayments more expensive.
And it means more misery for households who are already grappling with a cost of living crisis.
Exactly how much more your bill will be depends on the type of mortgage you have.
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Around 800,000 homeowners on a tracker mortgage directly linked to the base rate will see an immediate rise.
Nearly 2million on standard variable rates are likely to see their rate increase soon, as banks often pass on a rise within days or weeks – although it must tell you beforehand.
Laura Suter, personal finance analyst at AJBell said: “For those 1.9m who are exposed to mortgage rate rises the annual cost will increase significantly if the Bank increases rates by 0.5 percentage points.
“The average UK homeowner has £131,000 of mortgage debt, according to UK Finance, and so those on a tracker deal will see their mortgage costs rise by £396 a year.”
The exact rise will depend on how much you have borrowed and the rate you are on.
Those on a fixed rate are safe for now – but face a huge jump in borrowing costs when they come to remortgage.
Around 2.2million borrowers are due to come to the end of a deal that they fixed when the base rate was at a historic low of 0.1%.
On a fixed deal you lock in a rate for a certain period of time which keeps payments the same.
But those looking to remortgage as their existing deal is about to expire face a “mortgage shock”.
Alice Haine, personal finance analyst from BestInvest said: “Thankfully, three quarters of mortgage holders are on fixed rate deals, so they are protected for now, but anyone with a deal set to expire within the next six to eight months should look to shop around for a new fixed rate.”
Take someone who took out a two-year fix for a 25-year mortgage on a £250,000 home in September 2020.
They would have repayments of £1,089 a month and with an average rate at that time of 2.24%.
After that deal expires, moving on to the standard variable rate, which is currently at an average of 5.4% their repayments would jump to £1,489 a month – £400 more.
If the lender passes on the expected base rate hike, then repayments could jump to £1,593 – a jump of £504 per month.
How to avoid paying more for your mortgage
Anyone coming to the end of their fixed deal should act fast as moving on to a lenders standard rate is typically the most expensive form of borrowing, Alice said.
“However, with more rate rises to come this year and next, it would be wise to seek advice as this is a very changeable landscape.
“Finding the right product to suit your future plans is crucial as locking into a five- or 10-product if they have ambitions to clear their mortgage early or want lower repayments if better rates emerge in the future.”
If you find a good deal, lock in fast says Alice, as many banks and building societies pulling products from the market in the face of surging demand.
You can lock in rates with some lenders up to six months before your deal is due to end.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal but compare the costs first.
Overpaying your mortgage could also be an option to reduce costs, if you’re able to.
Alice said: “For the lucky ones with spare cash, overpay on your mortgage now to reduce the hit when the renewal date comes around.
“This could help to secure a better deal further down the line, particularly if you move down a loan-to-value band – say from 80% to 75%.”
How to get the best deal on your mortgage
Getting the best rate on your mortgage can depend on the rates available at the time, but there are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan to value ratio has changed this could also give you access to better rates than before.
A change to your credit score or a better salary could also help you access better rates.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also got to a mortgage broker who can compare for you, but you may have to pay for this service.
It could cost a couple of hundred pounds but it might save you thousands on you mortgage overall.
You’ll also need to factor in fees for the mortgage, though some have no fees at all, or you can add it on to the cost of the mortgage, but beware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember, that you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks, and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statement.
What does an interest rate rise mean for my debts and for borrowing money?
The cost of borrowing through loans, credit cards and overdrafts has already gone up as banks have passed on recent rises.
Certain loans you already have like a personal loan or car financing will usually stay the same, as you’ve already agreed the rate.
But rates for any future loan could be higher, and lenders could increase the rate on credit cards and overdrafts – although they must let you know beforehand.
You can cancel a credit card if you want, and will have 60 days to pay off any outstanding balance.
What does an interest rate rise mean for my savings?
Savers are getting some relief as interest rates are rising slightly for those with cash in the bank – here are the best rates you’ll find.
A rate rise is generally good news for savers especially after a long stretch of getting very low rates on their money.
Along with low rates, high inflation can erode away the value of any savings you have.
So if you have £100 in the bank this year and inflation is 10%, the real spending power of that money is reduced to £90 next year.
Another rate rise could see banks pass on higher rates to savers – though they are usually much slower to act than with passing on higher rates for borrowing.
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This means savings rates are more likely to edge up slowly rather than change immediately.
Anyone currently getting a low rate on easy access savings could find it’s worth looking around for a better rate after any rate rise and moving their money.
