UK interest rates: How Bank of England base rate rise affects mortgages, rents and savings

Mortgage holders on tracker deals face nearly £24 per month being added to their payments, on average, following the latest Bank of England base rate rise.

The Bank has heaped further pressure on mortgage holders by hiking interest rates for the 14th time in a row in yet another bid to get inflation under control.

Based on the mortgages outstanding, the new 0.25 percentage point rise, which takes the base rate to 5.25%, will add on £23.71 typically to monthly tracker payments, according to figures from trade association UK Finance.

For homeowners on a standard variable rate (SVR) mortgage, the average payment could increase by £15.14 per month. SVRs are set by individual lenders and often follow movements in the base rate. Taking all 14 base rate rises into account, average monthly payments will have increased by £488.50 for tracker deals and, assuming base rate rises have been fully passed on, £311.90 for SVRs.

Campaigners from Positive Money held a demonstration outside the Bank of England in London, protesting against the rises in interest rates amid the cost of living crisis. They called on the government introduce a windfall tax on bank profits.

The Bank of England uses base rate rises as a tool to cool inflation. Mortgage rates have jumped as inflation has been stubbornly high, but there has been a bigger-than-expected slowing in inflation recently. UK Consumer Prices Index (CPI) inflation was 7.9% in June, slowing from 8.7% in May, according to the Office for National Statistics (ONS).

This has fuelled expectations that the base rate may not need to climb so high.

What does the Bank of England base rate rise mean for mortgage holders and renters?

Around eight in 10 (81%) mortgage holders have fixed-rate deals – meaning rate rises only take effect when the deals end. About 800,000 fixed-rate deals are ending in the second half of 2023 and 1.6 million deals are due to end in 2024, according to UK Finance.

Richard Lane, director of external affairs at StepChange Debt Charity, said: “Those who have already fixed onto a new mortgage rate in the last few months will be facing significantly higher monthly payments, while many landlords have already passed on higher debt servicing costs to their tenants, making the private rented sector increasingly unaffordable to renters on low and middle incomes.”

Fixed mortgage rates have been holding steady in recent days. According to Moneyfactscompare.co.uk, the average two-year fixed-rate homeowner mortgage rate on the market is 6.85%, which is unchanged from Wednesday.

Back at the start of December 2021, the average two-year fixed-rate mortgage was 2.34%.

According to brokers, lenders had already anticipated Thursday's rate rise and priced this in to their products - with some expecting to see fixed rates continue to ease.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Lenders have already priced this increase into their fixed rates so we don’t expect pricing to rise. Indeed, a number of lenders have reduced fixed rates in the past few days on the back of calmer swaps, which underpin the pricing of fixed-rate mortgages. The extreme volatility we have seen in swaps over the past few weeks has settled following June’s better-than-expected inflation data.

“However, while other lenders may reduce their fixed rates, long gone are the days of rock-bottom pricing. Borrowers due to come off cheap fixes face a real payment shock, so it is important to plan ahead as much as possible and act now.”

Andrew Montlake, managing director of Coreco mortgage brokers, said: “Although tracker mortgages will increase on the back of today’s decision, we may well see fixed rates continue to ease slightly, especially as lenders look to get a better start to next year.”

Matt Smith, Rightmove’s mortgage expert, said that more positive inflation figures “have given the market renewed confidence that inflation will continue to fall, and the base rate won’t have to go as high as previously feared, meaning lenders can tentatively start to reduce rates”.

UK Finance has said it expects that the number of households in arrears in 2023 to remain below 1% of outstanding mortgages. Mortgage lenders representing over 90% of the mortgage market have signed up to the Government’s new mortgage charter, committing them to additional support for borrowers.

According to Nationwide, house prices were falling at their fastest annual rate in 14 years in July - showing signs that higher rates are already affecting the UK housing market. 

Will the Bank of England base rate rise be passed on to savers?

A watchdog has warned it will take robust action against lenders which refuse to pass on high rates to savers, amid concerns that customers are not being rewarded for loyalty.

Savers can now typically find a one-year deal at 5.21% and an easy access savings rate at 2.81%, according to Moneyfacts.

Shortly after the Bank’s base rate hike, HSBC UK and first direct announced plans to raise some savings rates from August 10. Among the increases, first direct’s Savings Account and HSBC UK’s Flexible Saver rates will both increase by 0.25 percentage points, from 1.75% to 2.00%. Both deals are instant access accounts.

But savers are being warned not to assume that base rate rises will be passed on automatically, and that they should shop around and compare deals.

Rachel Springall, a finance expert at Moneyfactscompare.co.uk, said: “It is imperative savers take time to review their existing accounts and not presume any base rate rise will be passed onto them, as this is never guaranteed. Those savers who have their cash sitting in an easy access account for convenience may find their loyalty is not being repaid.”

While savings rates have been improving, around £250 billion has been sitting in deposits which earn no interest.

The Financial Conduct Authority (FCA) said on Monday that firms offering the lowest savings rates will be required to justify by the end of August how those rates offer fair value. It has said it will take robust action by the end of 2023 against those who cannot demonstrate fair value.

The FCA made the announcement as it set out a 14-point action plan to make sure banks and building societies are passing on interest rate rises appropriately to savers.

As part of the plan, the regulator will review the timing of providers’ savings rate changes each time there is a base rate change. The FCA has also said it expects firms to take action to prompt their customers in lower-paying savings accounts or non-interest-bearing accounts to consider alternatives.

Jenny Ross, editor of Which? Money, said: “While some banks have been quick to pass on higher rates to mortgage holders, they’ve dragged their heels on handing savers better deals. Banks mustn’t treat mortgage holders and savers differently by raising rates at different times.

“The Financial Conduct Authority this week ordered firms to speed up the pace at which changes are passed on, with providers offering the lowest rates needing to justify their prices by the end of the month. The regulator must continue to hold banks’ feet to the fire – with tough action for those that continue to fall short.”