09 November 2017

How will the interest rate change affect you?

The Bank of England has raised its base rate benchmark for interest rates to 0.50%.

The rate is used as the standard level for banks and building societies to set the interest attached to mortgages and savings.

It is the first time the Bank of England has raised rates since July 2007, when the base rate rose to 5.75%.

The base rate was at 0.5% from March 2009 until August 2016, when it was further reduced to a record low of 0.25%.

It now returns to the level it was after a series of cuts in the aftermath of the financial crisis of 2008 aimed at stabilising the UK economy and to cut the cost of borrowing for people feeling financially stretched.

Why the change?

The rate rise was widely expected after inflation in the UK reached a five-year high of 3% in October, well above the Bank of England's inflation target of around 2%. Raising the interest rate makes saving money more attractive. When people are encouraged to save, it reduces spending, which in turn slows the economy and helps reduce inflation.

The Bank of England has also warned of the risks to banks of ballooning household debt. Increasing the interest rate makes taking a loan more expensive in the hope that it will curb consumer borrowing.

Over the last two years, the Bank has repeatedly warned everyone to be prepared for a rate rise but has reiterated that any rise will be “limited and gradual."

Even though the cost of taking out a mortgage has been at a record low, the Bank of England knows that many people have seen little or no increase in their net income over the last 10 years, with wage growth low and household debt at record levels.

How will the rise affect homeowners and savers?

A rise in the base rate usually means mortgage rates will rise. If you have a variable rate mortgage linked to the Bank of England base rate, it will automatically go up by the level of the rise, in this case by 0.25%. 

For many borrowers this will be the first time they have seen the cost of their mortgage go up. If you'd like to to get an idea of how the rate change could affect your monthly mortgage payments, you can use our rate change calculator.

Homeowners are likely to see some rates on new fixed-rate mortgage deals go up and cost more too. If you already have a fixed-rate deal, you won't see any increase until the deal ends.

The impact of the rise should be limited as most lenders use strict lending criteria to check that borrowers can manage the extra costs on a mortgage that a rate rise brings.

Savers could see rates finally start to rise and make some inroads into catching up with inflation and receiving a real return on their savings. But there can be a lag between the interest rate going up and providers increasing their savings rates.

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