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The Bank of England has raised the base rate to 1.25% as it continues to battle soaring inflation.
The Bank's Monetary Policy Committee (MPC) voted for a 0.25 percentage point rise, bringing the interest rate to the highest it’s been since January 2009.
This latest rise is part of a steady climb over the past six months. The rate was at a historic low of 0.1% in December 2021, but it’s now risen five times since then.
Here, Which? takes a look at what the rate increase could mean for homeowners and savers.
The Bank of England's Monetary Policy Committee (MPC) has voted by a majority of 6-3 to increase the base rate by 0.25 percentage points. Six members voted in favour of a 0.25 percentage point rise, while three voted for a 0.5 percentage point hike.
The MPC sets the base rate as part of its efforts to keep inflation at 2%. With gas and electricity prices having reached record highs, inflation is currently at 9% – more than four times the Bank’s target.
The MPC meets eight times a year to set the base rate. The results of the next meeting will be published on Thursday 4 August.
When the Bank of England lends money to commercial banks, the amount of interest they must pay back is determined by the base rate.
A higher base rate means lenders are charged more, and these higher costs are usually passed on to customers in the form of interest rate rises.
Theoretically, a higher base rate should mean mortgages get more expensive and that savings accounts pay more interest on your money, but that isn't always the case.
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Sign up nowThe vast majority of homeowners have a fixed-rate mortgage, which means the rate stays the same for a set period – usually two or five years.
If you've got a fixed-rate deal, you won't be immediately affected by the base rate change and will instead continue to pay the same amount until the end of your fixed term.
When you come to remortgage, however, you might find that deals have become more expensive
Tracker mortgages follow the base rate plus a set margin, for example, the base rate plus 1%. If you're on this type of deal, your rate will go up by 0.25 percentage points straight away.
Discount mortgages work slightly differently. They provide a discount on your lender's standard variable rate (SVR) – eg the SVR minus 1%.
Repayments on discount mortgages won't go up automatically due to the base rate rise, but there's a good chance your lender will increase its SVR by some or all of the rise in the coming days or weeks.
If you're on your lender's SVR, which may be the case if your fixed term has come to an end and you haven't remortgaged, you'll also see your bills rise if your lender hikes its SVR.
If your mortgage rate increases and you’re having trouble paying it, contact your lender to see what help it has available. You may have received an email outlining these measures from your bank already.
You can also contact debt advice charities such as Citizens Advice and StepChange.
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Listen nowIn theory, a base rate rise could lead to better interest rates on savings accounts. This would provide a boost to savers, who have been faced with a drought of high-interest savings options for years.
Unfortunately, there's no guarantee that your provider will pass on the latest increase – at least not immediately.
If you're thinking of switching to get a better rate, now is a good time to shop around to see what deals are available and whether you can take advantage of increased competition in the market.