Base rate rise effect on mortgages

Financial correspondent Vicky Shaw explains what the Bank of England news means

The Bank of England base rate has been increased to a level many homeowners will never have experienced before.

The rate of 1% has not seen since 2009. It was increased from 0.75% after a string of hikes in recent months.

The latest rise follows a range of bill increases in April, with rocketing inflation expected to peak at more than 10%.

Here is a look at how people’s mortgages, savings and investments could be affected by the latest base rate hike.

How will homeowners be affected?

Three-quarters of outstanding mortgages are on fixed rates, meaning these homeowners will not feel the immediate impact of a base rate rise, according to figures from trade association UK Finance.

Nearly one in 10 (9%) mortgages are trackers, with variable rates.

Some homeowners are on their lender’s standard variable rate (SVR). People end up on SVRs when their initial mortgage deal has ended, and the rate is set by the individual lender.

What will the impact on mortgages look like in cash terms?

Among the nearly nine million outstanding mortgages, the average balance on a tracker deal is £121,034.

Based on an average tracker balance, a 0.25 percentage point rise in the base rate would mean a homeowner paying around £25 per month more in mortgage interest, according to UK Finance.

The average fixed-rate mortgage balance is £161,774 while homeowners on their lender’s SVR typically have an outstanding balance of £76,499.

Someone on a typical SVR balance could pay around £16 per month more, assuming the lender passes on the 0.25 percentage point base rate rise in full.

What can mortgage holders do about the rises?

Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “Borrowers sitting on a variable rate may want to lock into a competitive fixedrate mortgage deal to protect themselves from rising interest rates, perhaps sooner rather than later as fixed rates rise, with the average two-year fixed rate surpassing 3.00%.

“Fixing for longer may be a logical choice for peace of mind with mortgage payments when other household costs are increasing.”

Will the rate rise mean better news for cash savers?

After a string of base rate hikes in recent months, savers will be hoping to see the impact on their accounts.

But Ms Springall said the average easy access savings account interest rate has crept up by just 0.20 percentage points since November, from 0.19% to 0.39%.

She added: “There is still room for improvement across the sector, but as rates rise, comparing deals and switching is wise.

“As we have seen before, it can take a few months for customers to see any benefit from a base rate rise but there is no guarantee that savings providers will increase their rates.”

Ms Springall said a 0.25 percentage point increase passed on in full would equate to receiving £50 more a year in interest based on a £20,000 investment.