It came after higher-than-expected inflation was announced earlier this week, and will affect various aspects of your finances, from credit card debt to savings.
What did the Bank of England announce?
The Bank confirmed that the base rate will increase from 4 per cent to 4.25 per cent – in December 2021, when the hikes began, it stood at only 0.1 per cent.
The Monetary Policy Committee (MPC) voted by a majority of 7–2 to increase interest rates by 0.25 percentage points. The two members who voted against were in favour of no hike, rather than a steeper rise of 0.5 percentage points.
The MPC, a group of economists that meets eight times a year, has been under pressure to lower inflation so it is closer to the 2 per cent target set by the Treasury.
Thursday’s decision was more difficult than usual as the Bank attempted to counter inflation – which has risen to 10.4 per cent – while supporting banks hit by rapid rate rises.
How much will my mortgage go up?
More than 1 million households are remortgaging after leaving their fixed-rate period at some point this year, the majority of whom are coming off rates below 2 per cent.
Their costs will go up when they remortgage, although it’s not a given that rates for fixes will go much higher than they currently are.
An extra 1.4 million people on variable deals – which include trackers – will see their monthly payments go up immediately.
Someone with a variable mortgage of £300,000 for 20 years will now pay an extra £33.14 a month, assuming they are on a repayment plan.
If somebody in the same circumstances is on an interest-only deal, their payments will go up by £62.50 a month.
The average UK mortgage debt is £137,934 and the average variable rate now stands at 7.37 per cent, factoring in today’s increase, according to data from Moneyfacts.
This includes standard variable rates, which are among the most expensive loans, and is the rate customers automatically roll on to once their fixed-rate period ends.
i calculated that the average home will now pay £348 extra. This assumes they have 20 years left on their interest-only mortgage and their monthly bill would be £848, while repayment-only mortgage holders will be paying £1,101 – up from £1,080 – an increase of £21 a month, or £252 a year.
Had the Bank of England increased rates by 0.5 per cent, the average variable rate would have reached 7.62 per cent.
The same average homeowner paying this would have seen their monthly repayment mortgage payment increase further to £1,122, or £877 for interest-only deals.
Lots of homeowners took to trackers after the disastrous September mini-Budget as the prices of fixed home loans soared.
Now many will go back to fixed-rate deals as tracker rates are less appealing. Meanwhile, the rates for fixes is coming down.
Should you switch mortgage?
David Hollingworth, associate director at L&C Mortgages, said: “Fixed rates have already improved substantially, with five-year rates still below 4 per cent and there’s nothing, so far, to suggest that will change significantly.
“Borrowers eyeing a new fixed deal would be better to take a deal now and keep it under review, rather than hold off in the hope of lower rates to come.
“In such a fast-paced market, it’s impossible to be sure where things could head from here. If rates do drop, then it should still be possible to switch, so having an option in the bag would be better than facing a period on a high variable rate.”
Andrew Montlake, of Coreco mortgage brokers, 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 too high if they want the business, you may even find rates go down further.”
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.