Millions of borrowers were dealt a “hammer blow” today after the Bank of England hiked interest rates to a 13-year high.
The Bank’s Monetary Policy voted to increase its base rate from 1% to 1.25% - marking the fifth monthly rise in a row - in a bid to bring down soaring inflation.
While three quarters of mortgage borrowers are on fixed rate deals, almost two million homeowners will be impacted because they are on variable rate and tracker deals.
Today's increase is expected to add around £21 a month - £252 a year - to the average repayments for a borrower with a £150,000 mortgage who is on their lender’s standard variable rate.
Since rates began rising late last year, their payments have jumped by £96 a month, according to calculations by broker L&C Mortgages.
The hikes will also impact the estimated 1.3million borrowers on fixed rate mortgages whose cheap deals are due to end at some point this year and have to get a replacement.
Andrew Hagger, personal finance expert at the website Moneycomms.co.uk, said: “The latest hike in mortgage payments will be a hammer blow to households up and down the country, who are facing a tsunami of increased costs for essential goods and services.”
Pat McFadden, Labour’s Shadow Chief Secretary to the Treasury, said: “This underlines the seriousness of the situation facing the economy.
“Many families will be worrying about the impact this will have on their household bills.”
Despite the latest hike, the Bank of England now warns that inflation could hit slightly above 11% in October, when energy prices are set to soar again.
Communities Secretary Michael Gove today admitted the country faces “tough times” ahead.
Speaking at a summit in London, he said while the Government had a duty to help the “very poorest”, pressure on the public finances meant it was unable to provide the level of support it would like.
He went on: “There are inevitably tough times ahead for the UK and the global economy.”
Why is the Bank of England raising rates?
To try to cool inflation. One of the Bank’s key roles is to anchor inflation at 2%, but inflation is already at a 40-year high of 9% and is forecast to go even higher.
Raising rates pushes up borrowing costs which is supposed to deter certain spending, and bring inflation down. It is also designed to help households and businesses plan ahead.
Some experts think the Bank should have raised rates sooner while others warn doing so now could tip the economy into recession.
What does it mean for mortgage borrowers?
The vast majority of borrowers are on fixed rates deals so will be shielded for now.
However, around two million mortgage borrowers are on variable rates deals.
Those on fixed rates home loans will be impacted when their cheap deal ends and they look to get a new one.
What about other loans?
Interest rates on personal loans are already at their highest in more than five years and could go higher still.
Overdraft rates could also rise.
While credit card rates might also move up, it comes amid a flurry of zero percent transfer and purchase rates, for those who are eligible.
What about savers?
Savers have been the forgotten victims of more than a decade of rock-bottom interest rates. Now the Bank of England is upping rates, savers should in theory be benefiting. BUT most big lenders are so awash with funds they don’t need to offer decent savings rates to claw more money in. So, expect some upping of saving rates, but not a rush.
Will interest rates keep rising?
Most experts think they will, but it is hard to say when and by how much.
Three members of the nine member Monetary Policy Committee voted for an even bigger rise of 0.5% today.
However, the Bank of England will also keep a close eye on other economic measures, including wage rises.
