Bank of England raises interest rate to 0.75 per cent — here’s what it means for homeowners

Millions of home owners were hit by another rise in mortgage bills this week as the Bank of England lifted its key interest rate to 0.75 per cent.

The 0.25 per cent hike is the third on the trot ordered by the Bank’s Monetary Policy Committee since December and raises the official cost of borrowing to its highest level since the start of the pandemic two years ago.

It will immediately increase the cost of tracker or variable rate mortgages, which move in line with the Bank of England’s rate, although these only account for around a fifth of the total number of home loans.

Interest rate rise: how will it impact monthly costs?

For a homeowner with a typical London 25 year mortgage of £250,000 it will lift the monthly bill by £35 from £1,318 to around £1,353.

For a borrower with a larger £500,000 mortgage the monthly repayments will rise by £70 from £2,636 to £2,706.

However, the vast majority of borrowers who are in fixed rate deals will not be affected in the short term. But, when their fixed rate deals expire they are increasingly likely to face a higher interest rate than the one they are currently on when they come to remortgage.

The best fixed rates for borrowers with a substantial deposit of at least 40 per cent who are looking to lock in for five years are just over two per cent, having been at all time lows of below one per cent last year.

Mortgage deals on offer now

HSBC are offering a deal at 2.06 per cent, while First Direct’s best rate is 2.14 per cent, according to the Moneyfacts comparison website.

For borrowers with a smaller 20 per cent deposit the best rates are around 2.2 per cent while they start at about 2.4 per cent with a 10 per cent deposit.

The best two years fixes are now only just under two per cent with Barclays offering a 1.94 per cent deal. They were as low at 0.8 per cent last Autumn.

What’s next for mortgage holders?

The Bank increased its interest rate from an emergency rate of 0.1 per cent to 0.25 per cent in December and to 0.5 per cent in February.

It is expected to rise further over the coming months to around one per cent to curb accelerating inflation, which could hit 10 per cent by the summer.

But fears that rates could go as high as 1.5 or even two per cent this year are now easing because of the huge economic uncertainty triggered by the war in Ukraine.

Thomas Pugh, economist at City accountants RSM UK, said: “Given how uncertain the economic outlook is at the minute we suspect the MPC will want to conserve as much flexibility as possible. This could mean that they drop their guidance that a modest tightening of policy is likely in coming months. Our base case is still that there is another rate rise in May, that would take rates to one per cent but the crisis in Ukraine could easily mean this is delayed.”

Today’s rise will immediately hit the budgets of around 200,000 home owners in London on tracker or variable rate loans adding to the acute squeeze on living standards. This is set to worsen dramatically next month when the cap on energy bills rises by 54 per cent to an average of £1,971.

Dominik Lipnicki, director at broker Your Mortgage Decisions said: "There are specific reasons for the current inflation we’re seeing and raising the Bank of England base rate does very little to fix the problem. We have all seen huge energy price increases and more are yet to come.

“Coupled with the upcoming National Insurance hike, this means that many people will struggle and many are already having to choose between heating and eating. By increasing their mortgage payments, this financial strain will only become more severe. Most agree that we are heading for a very tough year ahead, and raising rates now is not the answer."