Interest rate rises for first time in 3 years

Homeowners ‘clobbered’ as Bank warns cost of living could jump 6%

HOMEOWNERS were dealt a major blow ahead of Christmas yesterday after the Bank of England unexpectedly raised interest rates amid inflation fears.

The rise to 0.25 per cent will add an extra £144 a year to the cost of a typical mortgage at a time when families already face a cost of living crisis.

But with inflation now predicted to hit 6 per cent next year – the highest level seen in 30 years – the Bank said it had no choice but to act.

The move came despite signs the Omicron variant is already taking its toll on the economy and hammering businesses in the run up to Christmas.

Higher borrowing costs will pile even more pressure on families struggling to cope with soaring energy and food bills.

The Bank’s base rate has been at a record low 0.1 per cent since the start of the pandemic in March 2020. The increase will be only the third rise since the onset of the 2008 financial crisis.

‘Savers will grow old waiting for rises’

Homeowners who have locked into fixed rate mortgages will be spared any immediate increase in their monthly bills.

But about two million borrowers with variable rate mortgages will see costs jump from early in the New Year.

Borrowers with a typical £150,000, 25-year mortgage, on a standard variable rate of 3.59 per cent, will pay an extra £12 a month or £144 a year, according to broker L&C. Those with larger £450,000 loans will pay £444 a year more.

Meanwhile, savers thinking the rise is a glimmer of hope after years of rock bottom return face bitter disappointment.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: ‘High street banks will clobber mortgage borrowers, hiking their variable rates to the max as quickly as possible. Meanwhile savers will grow old waiting for them to pass on rises in savings rates.’

And even if savings rates do rise in line with yesterday’s base rate increase, it will not be enough to protect households’ cash from inflation.

Bank of England governor Andrew Bailey said rising gas prices, driven by tensions between Russia and Ukraine, will push inflation up to 6 per cent in the next few months.

He told the BBC: ‘We’re seeing more persistent inflation pressures and that’s what we have to act on. We’re concerned about inflation in the medium term and we’re seeing things now that can threaten that. So that’s why we have to act.’

Within hours of the announcement, some major lenders had already begun to inform customers of bill increases.

Britain’s biggest building society Nationwide texted customers on tracker deals to say it would write in January to set out how much extra they will owe.

And Santander said it was raising rates for customers on standard variable deals from 4.34 per cent to 4.49 per cent in February. Fixed deals for new borrowers are also expected to become more expensive. Ultra-cheap rates have steadily disappeared since speculation about an imminent rate rise began to grow two months ago.

The average two-year fixed deal available from the top ten lenders is now 1.35 per cent compared with 0.89 per cent at the start of October,

L&C figures revealed. And the average cost of the top ten’s cheapest five-year deals has risen from 1.04 per cent to 1.55 per cent.

Yorkshire and Skipton Building Society also removed all of their tracker deals after the announcement to recalculate rates.

David Hollingworth, of L&C, said: ‘This is sharp reminder rates can’t stay low forever but borrowers can take advantage of what remains a really competitive market and save hundreds of pounds a month by shopping around.’

Analysts warned households that yesterday’s increase was only the beginning.

The Office for Budget and Responsibility expects the Bank’s base rate to rise to 0.75 per cent by the end of 2023.