The Bank of England has raised the base rate to 1.75% as it continues to grapple with soaring inflation.
The Bank's Monetary Policy Committee (MPC) voted for a 0.5 percentage point rise, bringing the interest rate to the highest it’s been since December 2008.
This latest rise is part of a steady climb over the past nine months. The rate was at a historic low of 0.1% in December 2021, but since then it’s risen six times.
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 8-1 to increase the base rate by 0.5 percentage points.
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 9.4% – nearly five times the Bank’s target. It expects inflation to rise as high as 13% in the next few months.
The MPC meets eight times a year to set the base rate. The results of the next meeting will be published on Thursday 15 September.
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 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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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're likely to find that deals have become more expensive.
With rates rising, it's important to remember to switch deals at the end of your fixed term. If you don't, you'll be moved on to your lender's (SVR). SVRs are usually much more expensive - data from Moneyfacts shows they currently average 5.17%.
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 your mortgage rate increases and you’re having trouble paying it, contact your lender to see what help is available. You may have received an email outlining these measures from your bank already.
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In 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. Savings rates have been on the rise recently, but even the best rates are nowhere near matching inflation.
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.