The Bank of England’s Monetary Policy Committee (MPC) has voted unanimously to increase the base rate by 0.25%, taking it from 0.5% to 0.75%.
The change marks the first increase since last November and an end to months of speculation.
Here, we explain how the base rate works, and how this hike could affect your mortgage repayments and savings.
- If you’re looking for a mortgage that protects you against future base rate rises, you can get impartial, expert advice by calling Which? Mortgage Advisers on 0800 197 8461.
Base rate reaches highest level since 2009
Today’s rise means the base rate is now at its highest level since March 2009, when it dropped from 1% to 0.5%.
It stayed at 0.5% for over seven years until, in August 2016, it fell to 0.25% – its lowest-ever level.
There could be more increases to come, too, with some experts predicting that today’s rise could be one of several over the next couple of years.
What is the base rate and why is it important?
When the Bank of England lends money to commercial banks, they pay interest at a level determined by the base rate.
This then affects these ‘Swap’ rates – the interest rate banks charge when lending to each other – and these costs are ultimately passed on to customers.
The rate is decided by the Bank’s Monetary Policy Committee, with a target of keeping inflation as close to 2% as possible.
In theory, a higher base rate should mean better rates on savings but more expensive mortgages, but that isn’t always the case.
What happened to variable-rate mortgages last time the base rate increased?
Which? research conducted in June 2018 found that 26% of borrowers are paying their lender’s standard-variable rate (SVR), despite the fact that this could be costing them thousands of pounds more than a fixed-rate deal.
And the situation is likely to become worse for SVR mortgage holders. When the base rate increased in November, more than half (53%) of 90 providers increased their SVRs, so it seems highly likely this will happen again now the base rate has risen once more.
Whether you’re approaching the end of the introductory deal period on your mortgage or you’ve already been moved onto your lender’s SVR, you should act now to avoid paying more than you should.
- Learn more about the significance of the base rate in our full guide on the base rate and your mortgage.
Fixed-rate deals withdrawn from the market
If you’re looking for a new fixed-rate deal, you should be aware that rates may start creeping upwards following today’s announcement.
Amid interest rate hype between October and December last year, the average rate increased on two, three and five-year fixes.
Since then, the average two-year fixed-rate deal has remained fairly stable at 2.52%. But this could well rise now that the base rate has gone up.
In the month following the last base rate hike, our research showed that 224 fixed-rate deals increased in price. In addition, 135 products were removed from the market, including many of the cheapest deals.
Are tracker mortgages worth the hype?
In the last few months, tracker mortgages have started to become more attractive, and in some cases they have offered cheaper rates than equivalent fixed-rate deals.
Tracker mortgages are based on the Bank of England base rate plus a set percentage, meaning they’ll all go up by 0.25% now. For example, a mortgage charging 2.5% plus the base rate would have cost 3% in total before today, but will now rise to 3.25%.
Our research has found that you should proceed carefully when it comes to tracker mortgages, as any further base rate increase could set your costs spiralling.
- Find out more in our full guide to tracker mortgages.
Is the base rate hike good news for savers?
While savers might welcome an increase in the base rate, history shows that they might not see the full increase reflected in their accounts.
It’s no secret that savings rates have been disappointing for a long time, and November’s base rate rise did little to inspire banks to offer better deals.
When we looked at 327 variable instant-access accounts, we found that in the five weeks following November’s announcement, only one in five (21%) passed on the full rise to costumers, while nearly half (48%) didn’t change their rates at all.
- If you’re looking for a new savings account, check out the comparison tables from Which? Money Compare
Get personal advice from a mortgage broker
Responding to the base rate announcement, David Blake of Which? Mortgage Advisers said: ‘This won’t be the last rate rise we see, and today’s news should act as a wake-up call for those who haven’t reviewed their mortgage recently.
‘Over a quarter of homeowners are already on standard variable rates, making it likely that many are paying more than they need to, even without today’s rise.’
He added: ‘If you’re on a variable rate or are approaching the end of your current deal, it’s imperative that you understand the costs of today’s rate rise and act quickly before low rates become a thing of the past.
‘You might be surprised by the savings you could make through remortgaging and how much easier the whole process has become.’
You can see how different interest rates will affect your monthly outgoings with the Which? Mortgage Advisers mortgage repayment calculator.
If you’d like to talk through your mortgage options in light of today’s announcement, you can get a free call back from an adviser by filling out the form below.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.