Yesterday, the Bank of England raised its base rate by another 0.5% to 2.25%, the highest since the financial crisis of December 2008.
It is a measure implemented by the central bank in an attempt to control inflation, which currently stands at 9.9%. But most experts worry that raising the cost of borrowing simply adds another financial strain to those already burdened by rising costs of living.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “This is the kind of agonizing squeeze that borrowers have been dreading. The Bank of England has tightened rates another notch, increasing the pressure on borrowers, who have not seen rates like this in 14 years.
“It’s racking up additional interest charges at a time when we can least afford them.”
Indeed, this seventh consecutive hike since December will deal another blow to those with variable or tracker mortgages, who are automatically affected by base rate hikes, and anyone whose fixed rate is about to expire.
Sarah said: “The Bank of England now expects inflation to hit a lower than previously forecast peak of 11% in November.
“The energy price guarantee has been essential to control general inflation and protect it from the roller coaster of international energy prices. However, it was not enough to convince them that the price increase will be controlled without another sizeable increase.”
What the rise in basic rates means for savers
Sarah said savers will welcome the return of higher rates, but not if they’re stuck earning less than half a percent interest on an easy-access account with one of the big street behemoths.
Because not all providers are passing on rate increases and those interested in finding the best rates may have to put their money away for fixed periods of time.
According to figures from AJ Bell, easily accessible savings rates have jumped from 0.65% before the BoE started raising rates, to 2.1% now.
Laura Suter, head of personal finance at AJ Bell, believes they will continue to rise after the latest base rate hike. But she urged anyone with savings to be proactive and shop around for the best deal possible.
He explained: “Most savers will miss out. Millions of pounds will be in accounts earning very little interest. Savers who do nothing get nothing: they have to change to get a better return on their money.
“Just about anyone with money in a checking account, or who’s had their savings account for a year or more, could get a better rate by switching.
“If you have £10,000 in cash and no interest, you could be losing £210 a year if you don’t switch to the best easy access account. Opening an account now only takes a few clicks, which means you could get decent returns for 10 minutes of work by switching accounts.”
What will this mean for your mortgage?
For borrowers, especially those with a mortgage, another increase will be worrisome. The exact impact depends on the type of mortgage you have.
Alice Haine, personal finance expert at BestInvest, said: “With some households already struggling to absorb the reality of paying almost 10% more for a basket of goods than they did a year ago, the prospect of even higher mortgage rates could be a real turning point. for some,” she said.
“The government’s package of handouts and emergency measures to support struggling households may get more momentum when [Chancellor Kwasi] Kwarteng delivers his mini-budget on Friday as [he] He’s pinning his hopes on growth, but that doesn’t mean household finances aren’t already stretched to the limit with some people forced to budget very carefully just to keep their heads above water.”
So what does it mean to you?
If you have a tracker mortgage – the rise in line with today’s BoE hike will be instantaneous. If your offer is about to expire, you are encouraged to look into fixed rate offers to protect yourself from future rate increases.
If you have a standard variable rate (SVR) mortgage: These rates (which homeowners turn to when their initial deal ends and they don’t remortgage) also generally increase in line with the base rate. If you can switch, you’ll get a better rate by moving to a new deal, so it might be worth talking to a broker about remortgaging.
If you have a fixed rate: You will be protected from interest rate hikes until your offer expires. About three-quarters of mortgages are fixed, so most borrowers won’t see an immediate hit from today’s hike.
If you’re in the early stages of a five- or 10-year contract, Alice says, you can relax. But for those with rates due, the prospect of higher refunds looms.
“If they haven’t taken action in the run-up to their existing agreement’s expiration date, then they need to act very quickly, otherwise they risk ending up with their lender’s standard variable rate, one of the most expensive mortgage loans. Alice explained.
He added: “Remember, some lenders allow you to lock in a fixed rate up to six months before a current deal ends, something that allows borrowers to get ahead of future rate increases, so start looking for a new deal now if your current deal ends. it expires next spring.