The Committee’s decision to increase the base rate by 0.15 of a percentage point will come as a blow to homeowners with variable rate mortgages, who will face higher monthly payments at a time when other living costs are also rising sharply.
The Bank has left the base rate unchanged at 0.1% since March 2020, and the start of pandemic lockdown measures. Although many expected a rise could be delayed until next year there could still be further increases to come in the New Year.
The decision to raise interest rates was taken amid growing concerns about inflation, or the rate at which living costs are going up. Inflation, as measured by the Consumer Prices Index, jumped to 5.1% in the 12 months to November, up from 4.2% the month before, and more than double the Bank’s 2% target. Raising interest rates can help bring inflation down, as it makes the cost of borrowing more expensive, which in turn helps to suppress economic growth.
What the base rate rise means for youThe increase in the base rate provides a valuable reminder that low mortgage rates can’t last forever. Although homeowners with fixed rate mortgages won’t see any change to their monthly payments now, they should be prepared for higher costs when their current deals finish.
If you’re on a variable rate mortgage that tracks the Bank of England base rate, however, your mortgage rate will rise in line with Thursday’s increase, and your monthly payments will go up accordingly. That will typically take effect from the following month.
If you have any other type of variable rate mortgage, it will be up to your lender to decide whether they pass on the increase in full, but most people with variable deals, or who are on their lender’s standard variable rate (SVR), can expect their payments to rise over the next few weeks. Our SVR watch monitors movements in lenders’ SVRs, so you can see whether your rate has increased yet.
What you can do to limit the impact of a base rate riseRemember that if you are on or are about to move onto your lender’s SVR, you can usually make substantial savings by shopping around for a better mortgage deal. Our Cost of Doing Nothing calculator shows you the potential cost of staying on the SVR.
If you’re worried about your monthly costs rising if the base rate continues to climb, it’s not too late to lock into a competitive fixed rate deal, although the best deals are already disappearing fast. Bear in mind that the most competitive deals are usually only available to those with a hefty deposit or a substantial amount of equity if remortgaging.
If your current mortgage deal isn’t due to finish for a few months, you don’t have to wait for it to end to start the remortgage ball rolling. You can usually secure your next mortgage three to six months before you want it to start. Bear in mind that a fixed rate mortgage won’t be right for everyone, especially if you’re after flexibility or think that your circumstances could change soon, but they can provide valuable peace of mind for anyone looking for budgeting certainty.