The Bank of England has hiked interest rates to 3% (from 2.25%) in the eighth consecutive rise since December last year.
The move was widely expected by City forecasters as the Bank’s rate-setting Monetary Policy Committee (MPC) battles rocketing inflation. It measured 10.1% in the 12 months to September, due largely to the high cost of essentials including food, energy and fuel, and sits against a target of 2% set by the government.
What does a rate rise mean for home loans?
All mortgage customers on a variable rate deal, which accounts for around 2.2 million households according to figures from the Financial Conduct Authority (FCA), will be impacted by today’s rise.
Those with home loans linked directly to the Bank rate via a ‘tracker’ mortgage will see a hike in their monthly payments with immediate effect. The rise will add around £100 a month onto the cost of a £250,000 mortgage, or around £60 a month onto the cost of a £150,000 mortgage, for example.
Borrowers paying a standard variable rate (SVR) must absorb the rise whenever, and by what proportion, their lender decides to implement it. However, lenders typically pass on interest rate rises in full to SVR borrowers as soon as the following month’s mortgage payment.
The average SVR is currently a little over 6% according to data from Moneyfacts.co.uk, so could head towards 7% if the full 0.75 percentage point rate rise is passed onto borrowers.
However, SVR mortgages do not lock borrowers into their deal. This means that, circumstances permitting, they are free to leave at any time and remortgage to a better rate. Fixed rate mortgage costs currently start at around 6% over two years for borrowers with a 25% deposit.
The estimated 6.3 million households currently already on fixed rate mortgages will feel the impact of today’s rate rise, as well as the previous seven rises since December last year, when they reach the end of the contracted term. The FCA estimates that, for more than half of these borrowers, this will be within the next two years.
What can borrowers do?
Mortgage customers with less than six months to run on any kind of mortgage deal can start shopping around for a new home loan now. That’s because lenders allow you to lock in a rate up to half a year in advance.
It’s also worth finding out, in pounds and pence, exactly how much the rate rise could affect your monthly payments either now or in the future. The latest round of mortgage rate rises comes on top of other soaring household costs including food, energy bills and fuel.
But the MPC said it will not shy away from further increases in the Bank rate in its bid to return inflation to its 2% target level. It said in a statement: “Should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.”
The results of the next meeting of the Bank’s Monetary Policy Committee will be announced on 15 December.