The Bank of England has once again raised the base rate - this time taking the figure to 3.5% as it continues to battle soaring inflation.
The Bank's Monetary Policy Committee (MPC) voted for a 0.5 percentage point rise, bringing the rate to the highest it's been since 2008.
This latest rise is part of a steep climb over the past year, which has resulted in rising interest rates for both mortgages and savings. The base rate was at a historic low of 0.1% in December 2021, but since then it’s risen nine times.
Here, Which? takes a look at what the increase could mean for homeowners and savers.
Bank of England raises base rate to 3.5%
The MPC has voted by a majority of 6-3 to increase the base rate by 0.5 percentage points.
The committee sets the base rate as part of its efforts to keep inflation at 2%.
With gas and electricity prices having reached record highs, CPI inflation is currently at 10.7% – more than five times the Bank’s target. The Bank says it anticipates inflation will fall sharply from the middle of 2023.
The MPC meets eight times a year to set the base rate. This latest rise is not as sharp as November's, which saw the Bank hike its benchmark by 0.75% - the biggest single increase since 1989.
The results of the next meeting will be published on Thursday 2 February.
The graph below shows how the base rate has changed since July 2008, using data from the Bank of England.
Why does the base rate matter?
When the Bank of England lends money to commercial banks, the amount of interest they must pay back is determined by the base rate.
A higher base rate means lenders are charged more, and these costs are usually passed on to customers in the form of interest rate rises.
Theoretically, a higher base rate should mean mortgages get more expensive and that savings accounts pay more interest on your money, but that isn't always the case.
- Find out more: how the base rate works
Will the base rate increase further in 2023?
Financial forecasters feared we could see the rate hit 5% next year, but the Bank of England's governor, Andrew Bailey, suggested in November that the figure would not reach those heights.
It is predicted we will, however, still see increases in 2023 - with the base rate hitting somewhere between 3.75 and 4.75%.
What does the base rate rise mean for my mortgage?
The vast majority of homeowners have a fixed-rate mortgage, which means the rate stays the same for a set period – usually two or five years.
If you've got a fixed-rate deal, you won't be immediately affected by the base rate change and will instead continue to pay the same amount until the end of your fixed term.
When you come to remortgage, however, you're highly likely to find that deals have become more expensive.
With rates rising, it's important to remember to switch deals at the end of your fixed term. If you don't, you'll be moved on to your lender's standard variable rate (SVR), which leaves you vulnerable to further base rate rises.
Tracker, discount and standard variable rate mortgages
Tracker mortgages follow the base rate plus a set margin, for example, the base rate plus 1%. If you're on this type of deal, your rate will go up by 0.5 percentage points straight away.
Discount mortgages work slightly differently. They provide a discount on your lender's SVR – for example, the SVR minus 1%.
Repayments on discount mortgages won't go up automatically due to the base rate rise, but there's a good chance your lender will increase its SVR by some or all of the rise in the coming days or weeks.
How to get support if you're struggling to pay your mortgage
If mortgage rate increases mean you’ll struggle to make your repayments, you should contact your lender in the first instance.
Your bank might be able to offer support measures such as temporarily reducing payments or extending the term of your mortgage.
Our guide on what to do if you can't pay your mortgage outlines what support might be available and provides a list of charities that offer independent advice.
What does the base rate rise mean for savings?
In theory, the base rate rise could lead to better interest rates on savings accounts. This would provide a boost to savers, who have been faced with a dearth of high-interest savings options for years.
Unfortunately, there's no guarantee that your provider will pass on the latest increase – at least not immediately. Savings rates have been on the rise recently, but even the best rates are nowhere near matching inflation.
If you're thinking of switching to get a better rate, now is a good time to shop around to see what deals are available and whether you can take advantage of increased competition in the market.
- Find out more: how to find the best savings account
source https://www.which.co.uk/news/article/bank-of-england-raises-base-rate-to-3.5-aOxh81s1AUUa