Interest rates rise: mortgage bills soar for millions of homeowners as Bank of England increases interest rates to 0.25 per cent

·7-min read
 (Shutterstock / ZGPhotography)
(Shutterstock / ZGPhotography)

Millions of homeowners faced higher mortgage bills today after the Bank of England raised interest rates for the first time in more than three years.

The Bank’s Monetary Policy Committee (MPC) ordered a hike in its rate from the emergency record low of 0.1 per cent to 0.25 per cent amid fears over spiralling inflation.

It was the first increase in the official cost of borrowing since August 2018 when the rate was raised from 0.5 per cent to 0.75 per cent. It was lowered again in March 2020 at the start of the pandemic.

The decision, which caught many City commentators by surprise, comes the day after the official rate of inflation surged to a ten year high of 5.1 per cent

The impact of the hike will be felt within days or weeks by the more than two million borrowers on variable or tracker rates that move in line with the Bank’s rate. But there will be no immediate impact for the 80 per cent who are locked in on fixed rates.

What does the rate rise mean for London homeonwers?

A typical London owner with a variable or tracker repayment mortgage of £250,000 with 20 years left to will see their monthly bills go up around £20 from £1.461 to £1,481. For a £400,000 mortgage the increase is £31 from £2,338 to £2,369.

The fixed rates available in the market from major lenders have already started creeping over recent weeks as they anticipated the Bank of England’s move.

However, they remain at remarkably low levels with two year fixes available from around 1.3 per cent for borrowers with a deposits of at least 40 per cent, and five year deals from as little as 1.4 per cent.

There are around 11 million outstanding in the UK with a total value of around £1.5 trillion. Today’s hike will add around £38 million in total to monthly bills, or around £450 million annually.

Simon Gammon, managing partner, Knight Frank Finance, said: “By raising the base rate it’s clear that the Bank of England believes the economy will shrug off most of the effects of Omicron. Getting a grip on rising inflation appears to be the number one priority.

“Mortgage rates on the high street have been edging upwards during recent weeks in anticipation of this moment and it’s clear the lenders believe there could be at least one more hike in the base rate next year.

“Though mortgage rates have been rising, they remain very competitive by historic standards. Our advice to borrowers is to get an offer locked in now. Offers are typically valid for six months and can easily be amended should it be possible to lock in a more favourable deal at a later date.”

Ray Boulger, Senior Mortgage Technical Manager at brokers John Charcol said: “ As over 90 per cent of new mortgage lending has been on a fixed rate for the last four years and nearly 80 per cent of mortgage balances are currently on a fixed rate, only the 20 per cent of mortgage lending not on a fixed rate will initially be hit by the rate increase.

“Furthermore about half of fixed rate mortgages were initially fixed for at least five years and so many borrowers will be insulated from this rate rise for several years.

“However, the cost of most new fixed rate mortgages can be expected to increase further but as a result of increased competition for first time buyers, rates for 90 per cent and 95 per cent LTV mortgages are likely to increase less, or even remain broadly at current levels.”

Pete Mugleston, managing director and Mortgage Expert for, said: “Throughout 2021, we have seen mortgage rates consistently fall and homebuyers have definitely benefited from this, especially as house prices rise due to such high demand. However, it’s very unlikely that this will continue throughout the rest of the year and into 2022.

“Those who have a tracker mortgage that’s in line with the base rate of the Bank of England will likely see an immediate reaction of the interest rates rising on their mortgage repayments.

“Additionally, it’s likely that the extra money people will be paying each month will only cover the increased interest charges, and although they’re paying more each month, they won’t actually be clearing any more of their mortgage debt.

“Due to this, we’d advise anyone who is concerned about interest rates rising to apply for their mortgage as soon as possible, to ensure they’re able to take advantage of the rates that are currently available.”

Laura Howard, home and mortgage expert at financial platform Forbes Advisor, said: “It’s true that, even after today’s base rate hike, it will still be at super-low levels. But that will be of little comfort to the swathes of homeowners on tracker rate or standard variable rate mortgage deals whose monthly repayments are exposed to the rise.

“Increases in mortgage payments come at a time when many households are already grappling with rising costs just to pay for basic needs – such as heating their home, filling up the car, or doing the weekly food shop.

“Irrespective of today’s decision, many lenders have already priced in the prospect to their current mortgage range, marking an end to rock-bottom fixed rate loans.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “The rise in interest rates was expected yet still surprising as the Bank of England tends not to move rates in December. However, with inflation hitting a ten-year high, it seems as though the Committee felt it was finally time to move.

“The markets have already priced in a handful of rate rises, and mortgage pricing has already edged upwards accordingly. Lenders have pulled their cheapest rates although there are still plenty of competitive deals available starting at not much more than 1 per cent.

“Despite the rate rise, borrowers shouldn’t panic. Many borrowers are on fixed-rate mortgages so won’t see any difference to their monthly payments. Those on variable rates will see an uplift in their monthly costs but it will be a fairly modest rise, with rates remaining at incredibly low levels.

“If borrowers are concerned about further rate rises, it is worth securing a fixed-rate deal sooner rather than later. Speak to a whole-of-market broker for advice as to the best deal for your circumstances.”

What does the rate rise mean for first-time buyers?

Karthik Srivats, co-founder of mortgage lender Ahauz, which provides equity loans to first-time buyers, said: “After years of rock bottom rates, the tide has now turned and no group is going to suffer a greater squeeze on affordability than first-time buyers.

“Today’s announcement from the Bank of England comes at a time when young people already face a perfect storm of record house prices, soaring energy bills, and increased taxes.

“While some predict that higher interest rates could trigger a slide in house prices, that may well turn out to be wishful thinking.

“Equally likely is that we see property prices climb further as demand continues to outstrip supply. That means first-time buyers will end up stretched on all fronts.

“With speculation already rife that today’s hike may be the first of many, the current level of enquiries from borrowers looking for a long-term fixed deal could soon turn into a flood.

“We are already seeing demand for equity loans increase as borrowers look for new ways to increase their affordability and drive down overall borrowing costs.”

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