The Bank of England has increased interest rates to 4%, meaning some mortgage holders could pay hundreds of pounds more each year, with further rises potentially on the horizon.
The Monetary Policy Committee (MPC) raised the base rate from 3.75% to 4% on Thursday, marking the first increase in more than three years. Homeowners with tracker mortgages, which follow movements in the Bank Rate, will see their monthly repayments increase. Borrowers on standard variable rates could also face higher costs if lenders pass on the increase.
Impact on monthly repayments
According to calculations from Mojo Mortgages, someone with a £400,000 tracker mortgage over 25 years could pay approximately £59 more each month, adding £708 to their annual repayments. A borrower with a £250,000 mortgage over the same period could see payments rise by £37 a month, equivalent to £444 a year, while someone with a £150,000 mortgage could pay an additional £22 monthly, or £264 annually. The estimates assume the full 0.25 percentage point increase is passed on to borrowers.
Governor's warning on future hikes
Bank of England Governor Andrew Bailey warned that further increases could follow if the conflict in the Middle East continues to put pressure on inflation. Speaking after the interest rate announcement, he said: “There is now enough inflationary pressure in the pipeline caused by the rise in energy prices, that an increase in Bank rate is warranted.”
“Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase,” he added.
Advice for borrowers
John Fraser-Tucker, Head of Mortgages at Mojo Mortgages, warned that borrowers approaching the end of fixed-rate deals should review their options before being transferred to their lender's standard variable rate. He said: “For anyone coming towards the end of their deal, letting your mortgage roll onto a lender's Standard Variable Rate could easily be the most expensive mistake a borrower could make right now.”
Mojo Mortgages highlighted that standard variable mortgage rates are already above 7% at some lenders, leaving borrowers exposed to substantially higher repayments than those available on competitive fixed-rate deals. However, mortgage experts have cautioned that today's Bank Rate increase does not necessarily mean fixed mortgage deals will become significantly more expensive immediately.
Adam French, Head of Consumer Finance at Moneyfacts, said: “Today’s fixed mortgage rates have already priced in market concerns that Base Rate could hit 4.75% within the next 18 months or so. This means borrowers shouldn’t expect another significant jump in fixed rates simply because the Bank of England has raised rates today.”
Fixed-rate outlook
Unlike tracker mortgages, fixed-rate mortgage pricing is largely influenced by swap rates, which reflect financial market expectations about future interest rates. Mr French added: “Lenders price fixed mortgages against the risk of where interest rates could ultimately peak, rather than simply following Base Rate.” He warned that prolonged uncertainty over the Middle East conflict could increase inflationary pressures and push fixed mortgage rates higher.
Homeowners approaching the end of their existing deals are being encouraged to investigate refinancing options early, with many lenders allowing borrowers to secure a new mortgage offer several months before their current agreement expires. Mr Fraser-Tucker said securing an offer early could protect borrowers against further rate increases over the winter, while some mortgage providers allow customers to move to a cheaper deal if rates fall before completion.
Borrowers already on fixed-rate mortgages will not see their monthly repayments change as a direct result of today's announcement until their existing deal ends.
