Interest rates hit 3% in biggest rise for 30 years: what Bank of England hike means for money and mortgages

Homeowners are set to see mortgage costs soar as the Bank of England confirms its biggest single interest rate rise in more than 30 years.

The Bank’s base rate will rise by 0.75 percentage points from 2.25% to 3%, after eight consecutive hikes and further rises may be on the horizon to bring down runaway inflation.

It means that rates are now at their highest level since the 2008 financial crisis and will impact the approximately 1.8 million households whose mortgages are up for renewal next year. The base rate is important as mortgages are decided against this and when interest rates are higher, borrowing becomes more expensive.

Chancellor Jeremy Hunt has said families will face “very tough” times as mortgage costs soar, but insisted he was clearing up the economic mess left by former Prime Minister Liz Truss’ mini-budget fiasco in September. Bank of England governor Andrew Bailey said Truss’s economic policies would have a long-lasting impact, pushing up borrowing costs.

The Bank also warned that the UK could be on course for the longest recession since records began in the 1920s, piling more financial worries on already struggling households amid the cost of living crisis.

Its forecast was based on the base interest rate reaching as high as 5.2%, which is what the market expected, but in reality it said it does not expect rates to go nearly that high. Regardless, a recession is likely and from its highest to lowest point, GDP is expected to drop 2.9%, compared with 6.3% during the 2008 financial crisis.

Here is a look at what the interest rate rise could mean for household finances and mortgages.

What does the interest rate rise mean for mortgages?

Fixed rate mortgages

The interest rate rise to 3% will push up mortgage payments by around £73 per month for typical households, according to data from trade body UK Finance.

Fixed-rate mortgage holders are cushioned from the immediate impact of the base rate rise, but there are concerns people will have to re-mortgage onto a much higher rate when they eventually come off their deal.

The Bank warned that some households could see their interest payments increase by around £3,000 a year if they take out a loan that is 3.5 percentage points higher. However, Governor Bailey said that he now expects mortgage rates to drop from their currently very high levels, but they will still remain elevated.

This is because the higher base rate will soothe the financial markets and lead to a fall in swap rates – which is what mortgages are priced on. The remarks could be a glimmer of hope for the 1.8 million households whose fixed deals are scheduled to end next year. But for those who had to take out a new mortgage in the recent period of market volatility, the situation is “very unfortunate”, the governor acknowledged.

Tracker, discount and variable rate mortgages

Households that are on a tracker mortgage should see an immediate rise, as these deals move in line with the base rate.

For the average person with a tracker mortgage repayments will go up by £73.49 a month as a result of the hike, according to figures from trade association UK Finance. This equates to about £880 extra per year.

Those that are on a standard variable rate (SVR) mortgage will also likely see rates rise as well, but it is up to lenders to decide whether to pass on the increase. Mortgage advisers have said that anyone who is worried about their repayments going up should go straight to their mortgage provider for guidance.

MoneySavingExpert founder Martin Lewis warned homeowners what to expect from the rise and advised households to be prepared to pay more.

Speaking on Good Morning Britain, he said: “If you’re on a variable or discount or tracker rate mortgages you are going to see pretty quickly a rise in what you pay. My rule of thumb for how much it will go up on a typical repayment mortgage is expect to pay around £40 a month more per £100,000 of mortgage. So if you have got a £200,000 mortgage that would be £80 a month.

“Another way of saying it is just under £500 a month more per £100,000 of mortgage. And of course this is on top of the other rises that have been in place.

“If you’re on a fixed rate mortgage, well your mortgage rate is fixed so you won’t see any change. What you will see, and what you absolutely need to be prepared for, is you need to know the date when your fixed rate mortgage is going to end.

“I would start preparing three to six months before that happens and looking at what you can do then. Be under no uncertain terms though, anyone who has fixed over the last couple of years needs to be expecting to pay very substantially more when their current fix comes to an end.”

What could happen to mortgage prices in the future?

Inflation is expected to peak at around 11% towards the end of this year and then gradually decline over the next few years, meaning people should see price rises ease. Higher interest rates help with this because it encourages people to save, rather than spend and borrow, which lowers the rate of inflation.

The Chancellor warned there were “no easy options” for the government to bring the nation’s finances back under control, adding that “difficult decisions” will be needed. Hunt is expected to set out a package of tax rises and spending cuts in his 17 November autumn statement.

He said: “The best thing the government can do if we want to bring down these rises in interest rates is to show that we are bringing down our debt. Families up and down the country have to balance their accounts at home and we must do the same as a government.”

He added: “Sound money and a stable economy are the best ways to deliver lower mortgage rates, more jobs and long-term growth. However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”