Bank of England raises base rate to 1%: what it means for your mortgage and savings

The Bank of England raised the base rate to 1% today (Thursday 5 May) in an effort to combat skyrocketing inflation. 

The Monetary Policy Committee (MPC) at the Bank voted for a 0.25 percentage point rise, bringing the interest rate to the highest it’s been since February 2009. 

This rise is part of a steady climb over the past five months. The rate was at a historic low of 0.1% in December 2021, and it’s now risen four times since then. 

Banks and building societies use the base rate to inform the rates they offer to customers. So rises have previously led to increases in savings interest rates and mortgage interest rates. But neither of these things are guaranteed. 

Here, Which? takes a look at what this historic rate increase could mean for you. 

Why did the Bank raise the base rate?

The Bank of England sets the base rate – the rate at which it lends to institutions – as part of its efforts to keep inflation at 2%. 

With gas and electricity prices reaching record highs, inflation is currently at 7% – more than three times the Bank’s target. 

In its announcement, the Bank said it expects inflation to reach 10% later this year, but that it will fall next year and come close to the 2% target in around two years. 

The Bank signalled that it may need to increase interest rates further in the coming months, depending on what happens to the economy. 

• Find out more: inflation reaches 7%

Why the base rate matters

When the Bank of England lends money to commercial banks, the base rate determines how much they need to pay back. 

If the base rate is higher, that means banks are being charged more to borrow – and they usually pass these higher costs onto customers through interest rates on their products. 

That’s why a higher base rate can make mortgages and loans more expensive, but could also lead to savings accounts paying more in interest. However, it’s not always that straightforward. 

• Find out more: how the base rate works 

What does the base rate rise mean for my mortgage?

This will depend on what type of mortgage you have.

Fixed-rate mortgages

If you have a fixed-rate mortgage, it won’t be affected by the base rate change until after your initial fixed term – usually two or five years – comes to an end. 

When the time comes to remortgage, you may see the impact reflected in the available deals, which may be more expensive than what you were paying before. 

Tracker mortgages

Homeowners on tracker mortgages that follow the base rate will feel an immediate squeeze. Your rate will increase by 0.25 percentage points on your next repayment.

SVRs

Standard variable rate (SVR) mortgages can also be linked to the base rate, though they won’t increase automatically. 

Instead, you’ll have to wait and see how your lender responds to the base rate rise. They may well increase your rate, but it’s up to them. 

You’ll end up on your lender’s SVR if your fixed-rate mortgage comes to an end and you don’t remortgage. 

If you’re on an SVR mortgage, you might want to consider switching to a fixed deal as you're likely to find more competitive rates. You'll also be protected from any future rate rises for the duration of the deal.

• Find out more: cheapest mortgages revealed as rates continue to rise

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What to do if you can’t afford your mortgage

If your mortgage rate increases and you’re having trouble paying it, contact your lender to see what help they have available. You may have received an email outlining these measures from your bank already. 

You can also contact debt advice charities like Citizens Advice and StepChange. 

• Find out more: free debt advice contacts

What does the base rate rise mean for savings?

In theory, a base rate rise could lead to higher interest rates on savings accounts. This would be a boon for savers, who have been faced with a drought of high-interest savings options for years. 

The good news is that rates have been on the up following the recent base rate rises, but unfortunately there's no guarantee that your provider will pass on the latest increase - at least not immediately. 

Now's a good time to check what deals are available elsewhere and see if you can take advantage of increased competition in the market. 

Find out more: how to find the best savings rate