What the 0.75% interest rate hike means for your mortgage
The Bank of England has upped the base rate from 2.25% to 3%, as it continues to try and bring inflation to heel.
The 0.75% point rise is the biggest base rate hike since October 1989 when the Bank of England upped it by 1.13% points from 13.75% to 14.88%.
It is the Monetary Policy Committee's eighth consecutive base rate hike since December 2021 - decisions which have led to a significant rise in mortgage rates and savings rates. What does this mean for borrowers and savers and how high rates could go?
Why has the Bank of England is raising interest rates and what it means for the economy, mortgage borrowers and savers.
The move by the Bank of England mirrors the Federal Reserve in the US, which yesterday announced its fourth consecutive 0.75% point rise in interest rates.
The US central bank is also attempting to curb inflation, however, it also signaled that the pace of rate hikes may soon slow.
Some predict the base rate may continue to rise as high as 4.5% or 5% next year.
The rate rises are inflicting pain on many mortgage borrowers, who are seeing the cost of variable deals and new fixed rate deals rise rapidly. It means that monthly payments could rise by hundreds of pounds per month for some.
An estimated 1.8million homeowners are due to see their fixed rates end next year with the Bank of England indicating it is willing to keep raising interest rates, even if that triggers a recession.
But rising interest rates have spelled good news for savers, with interest rates paid on accounts rising to levels not seen for more than a decade.
Why is the Bank of England raising interest rates?
The Bank of England's key concern is inflation. Last month, annual inflation, as measured by the consumer prices index (CPI), came in at 10.1%. That's a long way off the Bank of England's long term inflation target of 2%.
Meanwhile, Retail price inflation (RPI), the old measure of living costs, came in at 12.6%, the highest level recorded since March 1981.
High inflation is a problem because with prices rising at a faster level than incomes, the spending power of money is eroded. It makes it difficult for businesses to set prices and for households to plan their spending.
The inflation being seen in the UK has largely been driven by external forces, the disruption of Covid lockdowns and the recovery, supply chain issues and a spike in energy, food and oil prices have been exacerbated by Russia's war in Ukraine.
But the concern is that once inflation gets embedded into household and business expectations it can lead to a vicious circle, involving wage demands and further price hikes.
CPI inflation now at 10.1%: It means consumer prices are rising by more than five times the Bank of England's long-term target of 2% © Provided by This Is Money
While the Bank of England can't do anything about global supply problems or energy prices, it can change the UK's single most important interest rate.
The base rate determines the interest rate the Bank of England pays to banks that hold money with it and influences the rates those banks charge people to borrow money or pay people to save.
The idea is that by raising base rate, it raises the cost of borrowing and that reduces demand for it from consumers, households and businesses, which slows the economy down.
It also makes saving more lucrative for Britons. This in theory should encourage people to spend less and save more and therefore help to push inflation down, by dampening the economy and the amount of money banks create in new loans.
Victor Trokoudes, co-founder and chief executive of the savings and investment app, Plum, says: 'While the magnitude of the increase was widely predicted, it's nonetheless a drastic move by the Bank of England designed to tackle the UK's rate of inflation, which is over five times their target.
'Raising rates should also strengthen the pound. So far, this hasn't been the case, especially compared to the dollar as the US has raised rates more sharply than the UK.
'The Bank of England will be hoping that today's announcement is seen as a clear signal about how serious they are about controlling inflation to restore credibility, so sterling can strengthen.'
How high will interest rates go?
Over the coming months, how high the Bank of England will hike interest rates to curb inflation is hard to accurately predict.
However, it will ultimately be a balancing act between trying to keep inflation under control whilst averting a painful recession.
Little more than a month ago, the common consensus was that the base rate would reach as high as 6% next year.
However some have now revised their view, partly thanks to the change in Government and economic policy. Economists now expect base rate to peak at about 4.75%.
Some believe it may not go that high, however. Kevin Mountford, co-founder of the savings platform, Raisin UK, says: 'The current rate rise cycle is likely to continue into 2023 albeit the peak should now be below the 6%t that was feared and could top out at just over 4%.'
What does the rate rise mean for mortgages?
The previous base rate increases since December 2021 have seen the base rate rise in either 0.25 point jumps and then most recently in September by 0.5% points. This took it from 0.1% to 2.25%, before the move today.
As a result, the typical cost of a mortgage has been pushed up over the past 11 months by successive base rate rises.
The cost of fixed rate mortgages has risen substantially over the past year, driven higher by the Bank of England raising rates and compounded by the fallout fom Liz Truss and Kwasi Kwarteng's badly received mini-Budget.
The debt-funded tax cuts in this - since reversed - triggered financial turmoil, government borrowing costs to spike, a pension fund bond sell-off vicious circle, and expectations rates would have to rise by more.
Government borrowing costs, as measured by gilt yields, have since fallen back to pre-mini-Budget levels after a Bank of England intervention, before Kwarteng and then Truss resigned and Jeremy Hunt took over as Chancellor and Rishi Sunak as Prime Minister, but fixed mortgage rates remain high.
The average two-year fixed mortgage rate is now 6.47% with a five-year fix at 6.32%. This time last year they were 2.29% and 2.59% respectively, according to Moneyfacts.
Repayments on the typical mortgage have now increased by hundreds of pounds annually since the base rate rises began.
How the typical fixed mortgage could rise £100 a month
Fixed mortgage rates are not tied to the base rate in the same way that tracker products are, but lenders do tend to pass on increases in the base rate to customers taking out new fixes – at least to some degree - as it increases the cost of their own borrowing.
Those already in fixed deals are protected until that deal period comes to an end.
If mortgage lenders did decide to increase their fixed increase rates by the same margin as the base rate, it could increase mortgage payments substantially on new fixed deals.
If a two year fix at the current average rate of 6.47% were to increase by the same level as the base rate, that would take it to 7.22%.
The cost of the average home, according to Nationwide's latest house price index, is roughly £268,000.
If someone was taking out a two-year fixed mortgage on such a home with a 25% deposit and on a 30-year term, their monthly payment would have been £1,266 based on 1 November average rates.
But if their lender put the rate up by the same amount as the base rate, it would increase their monthly payments by more than £100 to £1,367.
Had they taken out that same mortgage a year ago on 1 November 2021 at the then-typical rate of 2.29%, they could have paid almost £600 less, just £772.
How much could this cost people remortgaging?
During the pandemic house buying boom in 2020 and 2021, interest rates reached record lows with some deals priced at below 1 per cent - but now the cheapest fixed rate mortgage deals are now charging more than 5%.
The average borrower coming off a two-year fix will see their rate rise from 2.43% in November 2020 to 6.47%.
On a £200,000 mortgage being repaid over 25 years, a typical borrower in this situation will see their monthly repayments rise by £457, from £890 to £1,347. That equates to £5,484 more in mortgage costs each year.
With the base having risen again today, it is possible that mortgage rates will increase even further.
What the 0.75% interest rate hike means for your mortgage and savings: Bank of England ups base rate to 3% - the biggest rise for more than 30 years© Provided by This Is Money
The average two-year fixed mortgage rate is now 6.47% with a five-year fix at 6.32% © Provided by This Is Money
Could mortgage rates fall from here?
Despite the bumper rate rise today, there are already signs that the tide may be about to turn for mortgage rates. That is because, for the past few weeks, the base rate rise has not been the only factor affecting mortgage rates.
On 23 November, former prime minister Liz Truss' Government, led by then-chancellor Kwasi Kwarteng, announced a series of unfunded tax cuts in a mini-Budget that rocked the financial markets.
After that, the typical two-year fixed rate mortgage increased from 4.74% to a peak of 6.65% on 20 October, before reducing slightly to 6.47% as of 1 November.
Five year fixes followed a similar trajectory, going from 4.75% to 6.51% and then marginally back down to 6.31% as of Tuesday.
Lenders that have reduced their rates in recent days include Nationwide, HSBC, Platform and Virgin.
Furthermore, swap rates have been falling in recent weeks. Swap rates are an agreement in which two counter parties, such as banks, agree to exchange one stream of future interest payments for another, based on a set amount.
Put more simply - swap rates show what financial institutions think the future holds concerning interest rates. Lenders are essentially hedging their bets against what could happen to interest rates over various periods.
As swaps fall, mortgage rates typically fall. Conversely, if they rise, mortgage rates tend to follow suit.
Chris Sykes, a mortgage consultant at Private Finance says: 'We have already witnessed significant jumps in fixed rate mortgages after the market reacted to the disastrous mini-budget.
'Lenders are more likely to adjust their rates down rather than up following today's announcement, a contrast in rate direction compared to previous base rate rises.
'The base rate rising seems to be priced into fixed rate mortgage deals at the moment, with fixed rates generally being around 5.5-6%.
'With the base rate very significantly below this, it shows that lenders have not only factored in the base rate rise but also future increases too.
'We are currently in a situation where lenders are pricing far above swap rates and some have openly admitted to me that they need to start bringing down rates but don't want to be the first to do so as they'd get inundated so it'll be a slow process.
'Given this, I'd hope we have hit the ceiling, but it remains to be seen.'
Mark Harris, chief executive of mortgage broker SPF Private Clients, adds: 'The market was expecting a 75-basis point rise from today's meeting, taking the base rate to 3%.
'I tend to agree but it could have been worse if the Liz Truss government had continued. Rishi Sunak's appointment has brought some calm to the market after a period of significant turbulence.
'Swap rates have eased by more than 100 basis points over the past month since the furore surrounding the mini-budget settled down.
'Some lenders have started reducing their fixed-rate mortgages accordingly. While we don't think base rate will peak at 3% and borrowers may need to brace themselves for further rate rises, we don't believe rates need or can go much higher.'
What about those on tracker mortgages?
How the base rate will affect borrowers depends on the type of mortgage they have.
Fixed-rate mortgages are the most popular choice for homeowners in the UK, with around three quarters of borrowers opting for the product.
Those already on a fixed rate mortgage will not immediately feel the effect of the rise, as they are locked into their existing rate until the term ends.
While most borrowers prefer the certainty of fixed monthly payments, around a quarter of UK mortgages are on variable deals.
Variable rate mortgages include tracker rates, 'discount' rates and also standard variable rates, and monthly payments on them can go up or down.
Trackers follow the Bank of England's base rate minus a certain percentage, while discount rates are linked to the lender's standard variable rate.
Mortgage holders on a base rate tracker product will therefore see their payments increase immediately to reflect the rise.
Those on a variable discount rate or who have fallen onto their lender's standard variable rate, will be at the mercy of their lender discretion.
However, in all likeliness they will see rates edge up over the coming weeks.
According to Moneyfacts, the average SVR is now at 5.86%, up from 5.63% last month and up from 4.41% a year ago.
Sykes adds: 'We will see increases in variable and tracker mortgages following the base rate increase, however as fixed mortgage rates still remain significantly more expensive, many borrowers may still prefer to go for a tracker mortgage instead of a fixed rate for now, especially if there are no early repayment charges as this offers greater flexibility.'