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UK News: how will the interest rate rise affect you?

The Bank of England has yet again hiked interest rates, in the 12th consecutive rise since December 2021. This time the increase is 0.25 percentage points – taking the base rate to 4.5%. So what does that mean for your finances?

How will mortgage payments be affected?

Thursday’s move is more bad news for the 2.2 million people on a variable rate mortgage. Roughly half are on a base rate tracker or discounted-rate deal, with the remaining 50% on their lender’s standard variable rate (SVR).

A household with a tracker mortgage currently at 5.25% will see its pay rate rise to 5.5%. These deals directly follow the base rate. This means their monthly interest payments will rise by £21 a month, assuming they have a £150,000 repayment mortgage with 20 years remaining. Their monthly payments rise from £1,011 to £1,032.

The increase may not sound much, but as recently as last June, that same household would have been paying £776 a month, meaning their payments have risen by a third in just under a year – equivalent to a £3,000 annual increase.

A household with a £500,000 tracker mortgage with 20 years to go will see their monthly payments rise by £69 to £3,439 a month due to the latest increase.

SVRs change at the lender’s discretion, but most will go up, not necessarily by the full 0.25 percentage points. Some lenders may take time to announce their plans, but householders can similarly brace themselves for higher payments.

If you are one of the six million-plus households with a fixed-rate mortgage, you are unaffected by the latest interest rise. This group of borrowers will only feel the pain when their current deal expires and they have to renew, which might be between a few weeks or a few years.

And it could be about to get even more painful. The US investment bank Goldman Sachs warned this week that the Bank of England could be forced to raise interest rates to 5% this summer.

On the other hand, the mortgage market has settled down a lot after the chaos of last September’s Truss government mini-budget, as witnessed earlier this week with the news that Skipton building society has launched a 100% mortgage deal, albeit one where you have to fix for five years at a higher-than-average rate of 5.49%. Standard no-deposit mortgages have not been available since 2008, in the immediate wake of the financial crash.

While new fixed-rate mortgage pricing is not directly influenced by the Bank of England base rate and is largely dependent on money market swap rates, Chris Sykes, technical director at mortgage broker Private Finance, said there have been “slowly edging up lately and are now around 0.3% higher than they were a month ago in April”.

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