Bank of England base rate rises to 5% - how will your mortgage and savings be impacted?
The Bank of England has raised the base rate from 4.5% to 5% as it continues to grapple with stubbornly high inflation.
Members of the Bank's Monetary Policy Committee (MPC) voted for a 0.5 percentage point rise, marking the 13th consecutive increase.
The rise is yet another blow for mortgage holders who are already contending with surging interest rates in the midst of a cost-of-living crisis.
Here, Which? takes a look at what the base rate hike could mean for homeowners and savers.
Bank of England raises base rate to 5%
The MPC has voted by a majority of 7-2 to increase the base rate by half a percentage point - taking it to its highest level since September 2008.
This comes after Wednesday’s shock inflation figures showed the Consumer Prices Index remained unchanged at 8.7% in May against hopes of a sharp fall.
By increasing the base rate, the Bank hopes inflation will begin to ease and start edging towards the target of 2%. The idea is that higher interest rates mean less money is being spent by the population - resulting in overall spending in the economy falling and, eventually, price rises slowing.
Today's base rate is a far cry from the historic lows of December 2021, when it stood at just 0.1%.
The graph below shows how the base rate has changed since July 2008, using data from the Bank of England.
- Find out more: what's happening to supermarket food prices?
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 savings accounts pay more interest on your money, but that isn't always the case.
- Find out more: how the base rate works
Will this be the last base rate increase?
Earlier this year, the Bank said it believed inflation would 'fall quickly' from the middle of 2023, but this has not materialised and interest rates remain high.
This latest rise had been anticipated by experts in recent weeks, but many predicted it would jump by only 0.25 percentage points to 4.75%. And there are fears yet more hikes could follow.
The results of the next meeting will be published on Thursday 3 August.
What does the base rate rise mean for my mortgage?
The 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'll find that deals have become a lot more expensive. The average two-year fix is now above 6% and the average five-year fix is not far behind.
Andrew Bailey, Governor of the Bank of England, acknowledged the impact on borrowers: 'The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it.
'We know this is hard - many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.'
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 onto your lender's standard variable rate (SVR), which is more expensive and leaves you vulnerable to further base rate rises.
The graph below shows the relationship between base rate changes and mortgage rates for two and five-year fixes, using data from Moneyfacts.
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 of a percentage point straight away, so borrowers will face immediate increases in their bills.
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, which will push up your bill.
- Find out more: Bank of England base rate and your mortgage
How will your mortgage payments be affected?
By entering your details into our mortgage repayment calculator, you'll be able to see how your current payments could change if you had to pay a higher rate.
Our guide on what to do if you can't pay your mortgage outlines what support might be available if you're struggling to meet your monthly bill.
Higher rates will also have an impact on renters, as buy-to-let landlords will likely pass on increased costs to their tenants.
Ele Clark, Which? Money senior editor, said: 'Anyone worried about paying their mortgage should speak to their lender, as they are obliged to offer support.
'Help could include payment holidays, interest-only payments or extending the term of your mortgage. Unplanned missed payments can harm your credit rating, so it's best to speak to your lender and agree on a way forward before it comes to that.
'It's vital that the financial regulator closely monitors whether banks are doing a good job of helping mortgage holders during this difficult time and acts quickly if they are falling short.'
- Find out more: what to do if you can't pay your rent
What does the base rate rise mean for savings?
In theory, the base rate rise should lead to better interest rates on savings accounts. However, there's no guarantee your provider will pass on the latest increase – at least not immediately.
Savings rates have been on the rise recently, but even the best current rates are nowhere near matching inflation, with the top rate for a one-year fixed now being 5.7%.
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.
Rachel Springall, finance expert at Moneyfacts, said: 'The top easy-access accounts pay around 4%, with the market average around 2%, however, some of the biggest banks pay much less.
'Challenger banks and building societies continue to offer some of the top returns and have the same deposit protections in place as the more familiar high street banks, so there is little reason to overlook them in favour of a well-known brand.'
- Find out more: how to find the best savings account
'Banks should pass on increased savings rates'
There have been strong calls over the past few months for banks to pass on better savings rates to their customers.
Following today's (Thursday 22 June) base rate announcement, Ele Clark said: 'It won't be lost on savers that some banks have been very quick to increase mortgage rates, but they should not treat mortgage holders and savers differently by hiking rates at different times.
'The Financial Conduct Authority should not hesitate to step in should banks continue to treat customers in this way.'
