The Bank of England has increased the base rate from 4 per cent to 4.25 per cent, the eleventh consecutive hike since December 2021, when rates were just 0.1 per cent.
Today’s decision was even more difficult than usual as the Bank attempted to counter inflation – which was higher than expected last month, increasing unexpectedly to 10.4 per cent. Since November this rate had been falling, until last month.
The new rate has been decided by the Monetary Policy Committee (MPC), a group of economists who meet eight times a year. They have been under pressure to hike rates to meet the Bank’s two per cent inflation target and by increasing rates they suck money out of bank accounts by making us pay more our mortgages and credit card lending, thereby stopping us paying more for goods.
i examines what a 0.25 percentage point rise means for our money.
Around 1.4 million households are remortgaging after leaving their fixed rate period at some point this year, the majority of whom had been paying at rates below 2 per cent. Their costs will go up when they remortgage, though it’s not a given rates for fixed loans will go up. An extra 3.6 million are on variable deals – which include trackers – will see their monthly payments go up straight away.
Someone with a tracker mortgage of £300,000 for 20 years will pay an extra £33.14 a month assuming they are on a repayment plan.
If the same person is on an interest-only deal, the payments would go up by £62.50 a month.
Lots of homeowners took to trackers post mini-Budget as the prices of fixed home loans went through the roof. Now many will be going back to fixes as trackers become less appealing as rates go up. Meanwhile the rates for fixes is coming down.
First Direct, Cumberland and Principality Building Societies all now offer two-year fixes that are below 5 per cent, some available if you have a deposit as low as 15 per cent.
Mortgage brokers report that increasing number of clients are opting for a two-year fixed-rate mortgage in the hope that when the fixed period is up, they can fix for longer when (it is hoped) rates comes down.
Andrew Montlake of brokers Coreco said: “If the Bank says it is nearing the top of where it needs to be, and won’t make any more hikes, then you might find fixed rates fall a little. As the housing market is cooling and lenders can’t go to high if they want the business, you may even find rates go down further”.
One of the best outcomes from rising interest rates is higher savings rates. Some lenders, usually the smaller ones, are likely to increase rates straight away, while the majority will increase some rates for accounts, often the ones that cost them the least amount of money and many won’t increase at all.
“The good news is that savings rates have once again become far more tethered to what happens to the Bank of England base rate,” said Anna Bowes, founder of the Savings Champion website.
“But how much savers benefit will vary from one savings provider to another.
“If you haven’t reviewed your savings accounts recently, now is a good time to do so as you could well increase the interest you are earning.”
Fixed rate accounts are a different matter as the rate of interest offered tends to be based on what the market expects the base rate to do in the year(s) ahead.
At the moment there is still the feeling that inflation is likely to start falling and therefore we could be close to the top of the rising base rate cycle.
“As a result, fixed term rates could well remain flat. That said, there has been a flurry of positive rate rises over the last few weeks – so there may be gems out there if you act fast. But if you are constantly waiting for better rates to come along, you are missing out on more interest in the meantime, and might miss the latest peak.”
Credit card and debt
A higher base rate is bad news for borrowers as more of their money is taken up by interest payments on loans, mortgages, credit cards and overdrafts.
If there is an increase, the interest rate on your credit card or overdraft could go up. However, your credit card provider must give you notice before this happens.
If you borrowed £1,000 on overdraft for a whole month at 39.9 per cent it would cost you £33.25 but on a credit card charging 21.9 per cent, it would cost £18.25. If you paid off you card statement balance in full, you’d pay no interest at all.
Therefore, those with large debts could explore signing up for a zero per cent balance transfer credit card that clears the debt with no interest applied for a set period. The best ones around at the moment include MNBA which offers up to 31 months interest free, but with a one-off 3.49 per cent fee when you transfer money in. Also, NatWest and the Royal Bank of Scotland offer 19 months with no fee.
Annuities and pensions
The state pension will rise by 10.1 per cent in April 2023 in line with inflation.
If someone holds a significant amount of cash in their pension, interest rate increases will help produce higher levels of growth, but at the moment it will not be anywhere near inflation.
Meanwhile, those with annuities will likely benefit. An annuity provides you with a regular guaranteed income in retirement. You can buy an annuity with some or all of your pension pot.
It is difficult to say exactly how much rates will go up by as annuities are largely priced on the direction of gilt yields and not the base rate per se (gilt is government debt).
Helen Morrisey of Hargreaves Lansdown said: “We’ve seen annuity rates come down from the dizzy heights we saw in the aftermath of the mini-Budget and they have stabilised in recent months. An interest rate increase could give them a boost but it’s also likely an increase has already been priced in and they will remain fairly stable.
“Despite this, annuity rates remain much higher than they were this time last year and should always be a consideration for someone looking for an element of guaranteed income in retirement.”
The best annual annuity income from a £100,000 pension for someone aged 60 with a five-year guarantee is £6,006. This increases to £6,718 for a healthy 65-year-old.