bank rate represented by a toy house sitting on a calculator

What Does the Bank Rate Increase Mean for Your Mortgage?

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The Bank of England recently made the decision to increase the base bank rate by 0.5 percentage points, bringing it up to 5 percent. This move, aimed at addressing persistently high inflation, marks the 13th base rate hike since December 2021.

This current move has resulted in the sharpest rise since 1989. Over the course of 18 months, the base rate has jumped by 4.9 percentage points, reaching its highest level since April 2008.


Why Did the Bank of England Raise the Rate?

Inflation, driven by factors such as high food, flight, and gas prices, has prompted the decision to raise the rate. This is in an effort to combat rising inflationary pressures. The Monetary Policy Committee (MPC) voted 7–2 in favor of the bank rate increase. Two members preferred to maintain the rate at 4.5 percent.

In May, the official consumer prices index measure of inflation (CPI) remained at 8.7 percent. It was unchanged from April, according to the Office for National Statistics. Core inflation, which excludes volatile food and energy prices, continues to rise.

By increasing the cost of borrowing for individuals and businesses, the aim is to reduce demand and slow the flow of new money into the economy.

The latest inflation figures dispelled any speculation that the rate hike in June would be the last in the cycle. The debate on when inflation will fall sufficiently to end the bank rate hikes has been reignited.

What Does Inflation Have to Do with the Bank Rate?

According to Andrew Goodwin, chief economist at Oxford Economics, the phase of inflation we are experiencing is primarily driven by strong wage growth, as companies are passing on higher wage costs to consumers. This is a concern the Bank has had for some time. This scenario implies that inflation and interest rates will remain higher for longer than anticipated.

While successive interest rate rises have created a mortgage crisis for some, particularly those due to remortgage soon, savers have benefited from higher interest rates. Savings accounts now offer some of the most attractive rates in recent years.

In theory, this encourages individuals to save more and spend less. Experts anticipate that this will curb inflation by slowing economic growth. However, the downside of higher interest rates is slower economic growth and increased fears of a recession.

How Will All of This Affect You?

Some banks have already increased their savings rates prior to the Bank of England’s decision. However, it remains uncertain whether all providers will follow suit. In the past, some banks and building societies have used a rising bank rate to improve their margins. When they do this, they pass only limited benefits on to savers.

Advisors urge savers not to remain loyal to their current bank or savings provider. Instead, savers should proactively seek out the best rates available. Independent best buy savings tables can be a useful resource to find competitive rates offered by challenger banks and building societies for mortgages and anything similar. This includes second mortgages and secured loans. (Source: Proper Finance)


Will Mortgage Rates Rise Too?

Mortgage rates are likely to be affected by the rate rise, albeit to varying degrees depending on the type of loan. Tracker and variable rates will probably move in response to the increase. Meanwhile, fixed rates are less certain as some lenders may have already factored in the higher cost.

For the 1.4 million people due to remortgage this year, the price increases will have a significant effect on their finances, particularly for those currently benefiting from rates below 2 percent.

Although fixed mortgage rates are not directly tied to the base bank rate, lenders often pass on the increased cost of borrowing to consumers. As a result, fixed rate mortgages are likely to rise.