Yesterday the Bank of England raised its key rate by a further 0.5% to 2.25%, the highest since the December 2008 financial crisis.
It is a decision that was implemented by the central bank in order to control inflation which is currently at 9.9%. But most experts fear the rising cost of borrowing will only add further financial pressure to those already overburdened by the rising cost of living.
Sarah Coles, Senior Personal Finance Analyst, Hargreaves Lansdown, said: ‘This is the kind of agonizing squeeze borrowers have been dreading, the Bank of England has tightened rates another notch – piling pressure on borrowers , who haven’t seen rates like this in 14 years.
“It accrues additional interest charges at a time when we can least afford them.”
Indeed, this seventh consecutive hike since December will deal a further blow to those with a tracker or variable mortgage – which are automatically impacted by base rate hikes – and to anyone whose fixed rate is on the verge of to expire.
Sarah said: “The Bank of England now expects inflation to peak lower than expected at 11% in November.
“The energy price guarantee has been instrumental in containing global inflation and protecting against the roller coaster of international energy prices. However, that was not enough to convince them that the price hike will be brought under control without another big hike. »
What the base rate hike means for savers
Sarah said savers would welcome the return of higher rates, but not if they’re stuck earning less than half a percent interest in an easy-access account with one of the big money giants. street.
Because not all providers pass on rate increases and those who want to find the best rates may well have to freeze their money for fixed periods.
According to figures from AJ Bell, the best easy-to-access savings rates have fallen from 0.65% before the BoE started raising rates, to 2.1% now.
Laura Suter, head of personal finance at AJ Bell, thinks they will climb further after the latest base rate hike. But she urged anyone with savings to be proactive and seek the best deal possible.
She explained: “Most savers will be away. Millions of pounds will be deposited in accounts earning very little interest. Savers who do nothing get nothing – they have to change to get a better return on their money.
“Almost anyone with money in a checking account, or who has had their savings account for a year or more, could get a better rate by switching.
“If you have £10,000 in cash and it’s not earning any interest, you could be missing out on £210 a year by not upgrading to the best easy-to-access account. Opening an account now only takes a few clicks, which means you could get a decent return for 10 minutes of work switching accounts.
What will this mean for your mortgage?
For borrowers, especially those with mortgages, a further increase will be worrying. 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 a year ago – the rate outlook even higher mortgages could be a real tipping point for some,” she said.
“The government’s package of grants and emergency measures to support struggling households could receive more impetus when [Chancellor Kwasi] Kwarteng delivers its mini-budget on Friday as [he] is pinning its hopes on growth, but that doesn’t mean household finances aren’t already stretched to the max, with some people forced to budget very carefully just to keep their heads above water.
So what does this mean for you?
If you are on a follow-up mortgage – the increase in line with today’s rise by the BoE will be instantaneous. If your agreement is about to expire, you are advised to look for fixed rate deals to protect yourself from future rate hikes.
If you are on a Standard Variable Rate Mortgage (SVR) – these rates (which owners revert to at the end of their original contract and do not repay) generally also increase with the base rate. If you’re able to switch, you’ll get a better rate by switching to a new deal, so it might be worth talking to a broker about remortgage.
If you are on a package – you will be protected against interest rate increases until the expiry of your contract. About three-quarters of mortgages are fixed, so most borrowers won’t see an immediate impact 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 whose rates expire, the prospect of higher repayments looms.
“If they haven’t taken action before the expiration date of their existing agreement, they need to act very quickly or else they risk being left with their lender’s standard variable rate – one of the forms of most expensive mortgage,” Alice explained.
She added: “Remember that some lenders allow you to lock in a fixed rate up to six months before the end of an ongoing deal – something that allows borrowers to anticipate future rate hikes – so start looking for a new deal now if your current contract expires next spring. »