The Bank of England has raised its base rate from 3.75% to 4%, the first increase in more than three years, as sharply rising inflation prompted action from the Monetary Policy Committee. The hike, the first since July 2023, returns rates to where they stood last autumn.
Inflation has spiked to 3.5% following an energy shock caused by soaring oil and wholesale gas prices, linked to US President Donald Trump's war with Iran. Economists expect further rate hikes next year.
Impact on borrowers
Most mortgage borrowers are shielded from the increase because they are on fixed-rate deals. Trade body UK Finance says 87% of the total 8.47 million mortgages are fixed. However, that still means nearly one million borrowers - 510,000 on tracker mortgages and 470,000 on their lenders' standard variable rate - are likely to be affected. The average standard variable rate as of November 1 was 7.13%.
In addition, around 2.3 million of the 7.36 million fixed-rate mortgages will expire across 2027, leaving those borrowers at risk of a bill shock when they remortgage.
Someone with a typical £150,000 25-year variable rate mortgage faces a £24 to £288 a year rise in repayments, according to broker L&C Mortgages. That rises to an extra £32 a month (£384 a year) for a £200,000 home loan, and a borrower with a typical £350,000 mortgage faces an extra £57 a month, or £684 a year.
Those coming off cheap-rate mortgages will see a punishing jump. Back in 2021, the average five-year fixed remortgage rate among the top 10 lenders was just 1.30%, meaning repayments on a £200,000 mortgage over 25 years have been around £781 per month, according to L&C. At today's average rate of 5.16%, those repayments would jump to £1,188 per month, an increase of more than £400 each month or nearly £4,900 a year.
David Hollingworth, from L&C, said: "Anyone looking for a new mortgage deal will have seen how volatile the market has been this year. Fixed rates have shot up in anticipation of interest rates climbing in response to higher inflation. With so much uncertainty still at play it makes sense for borrowers heading toward the end of their current deal to start planning ahead."
He added: "It's possible to lock a rate in as much as six months in advance, which would help to protect against any further increases. However, it still gives enough flexibility to change deal before you complete, so if rates fall back you can still take advantage of lower rates."
According to analysis by Moneyfactscompare.co.uk, the average new mortgage rate has climbed to a three-year high of 5.89%, up from 5.83% at the start of October, as lenders push up fixed rates ahead of the Bank of England base rate decision.
What it means for savers
The flip side for savers should mean better returns, but only if banks and other providers choose to raise deposit rates. Kevin Mountford, personal finance expert and co-founder of Raisin UK, said: "A change in bank rate does not automatically mean a better deal for savers. What matters is whether banks pass on any increase, and how quickly customers see the benefit.
"Following last week's Budget, savers already have several changes to consider, including higher taxes on savings interest from next April. The Bank's decision adds another factor for households trying to make their money work harder."
Moneyfacts says the average one-year fixed-rate savings product (based on a £10,000 balance) pays 4.57%, with 2.58% for the average easy access account, and 4.48% for one-year fixed cash ISA.
Pensioners and future rate outlook
Pensioners are more likely to be savers than borrowers, so will be hoping for a better return on their nest egg. Maike Currie, from PensionBee, said it could impact those saving for retirement. She explained: "When the mortgage is your biggest monthly outgoing and suddenly becomes significantly more expensive, something else has to give.
"For many households, the temptation will be to reduce or pause pension contributions to free up cash today. But pension saving shouldn't automatically become the first casualty of rising mortgage costs. Pensions are one of the few areas of household finances where your money benefits from both tax relief and, for workplace pensions, employer contributions."
The rate hike is not expected to be the last, say economists. Pantheon Macroeconomics forecasts inflation rose from 3.5% to 3.7% last month. "We expect inflation to peak at 5% in February and the MPC to hike three times by next April," said Rob Wood, its chief UK economist.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said: "The outlook for interest rates remains at the mercy of events in the Middle East. If current conditions linger, the chances of policymakers being compelled to tighten policy again early in 2027 will only grow."
If the Bank of England's base rate rose to 4.5%, it would mean an extra £876 a year in repayments on a typical £150,000 variable rate mortgage, £1,176 on a £200,000 home loan, and £2,052 on £350,000.
