The Bank of England has raised interest rates for the 11th time in 18 months, prompting fears it could plunge mortgage holders into financial difficulty. The latest increase was announced on Thursday March 23 and sees the base rate go up by a quarter of a percentage to 4.25%, the highest it has been since 2008.
The Bank of England said it expects the UK economy to grow slightly between April and June, revising a previous forecast that gross domestic product (GDP) would drop by 0.4%. The increase to rates came after CPI inflation rose to 10.4% this week, up from 10.1% in February and having hit a 41-year high of 11.1% in October.
Thursday's hike will hit millions of people's pockets, with pressure likely to increase on mortgage holders already being squeezed by ongoing cost rises. Here is what the interest rates increase is likely to mean for your money, and when rates might go down. To get all the latest money-saving news straight to your inbox sign up here.
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How will I be affected by interest rates going up?
The biggest impact of rising interest rates will be for the roughly 33% of people in the UK who have mortgages. Increasing the base rate of interest means that many on tracker and variable deals often see an almost immediate increase in their monthly payments as they are set against this base rate. For example, in September the Bank of England raised interest rates in from 1.75% to 2.25% – the seventh rise since December 2021 and the highest they've been in 14 years. This had an almost instant impact on those with tracker deals, with the Financial Times using an example that a tracker rate rising from 3.5% to 4% would cost almost an extra £60 a month on a £200,000 loan.
Financial journalist Martin Lewis previously spelled out the huge impact this could have on your finances in a MoneySavingExpert newsletter where he said: “For each one percentage point your mortgage rate increases, expect to pay roughly £50 more a month (£600/year) per £100,000 of mortgage debt.” He added that rising rates “will likely push millions renewing when their fixes end into 'can't pay my mortgage' territory”.
According to iNews, the 0.25 percentage point increase on Thursday means someone with a tracker £300,000 for 20 years will pay an extra £33.14 a month and they are on a repayment one. If the same person is on an interest-only deal, the payments would go up by £62.50 a month. Reaction on Thursday was mixed, with some praising the decision and others questioning it. Head of Corporate Partnerships at Sirius Property Finance, Kimberley Gates, said: "An 11th consecutive interest rate hike will come as a blow to the nation’s homebuyers who will now see the cost of securing a mortgage climb that little bit higher at a time when they are already struggling with the wider cost of living.
"The silver lining is that today’s increase is the lowest since August of last year which suggests we could be over the hump. However, we expect that interest rates will continue to rise before they fall, with the general consensus being that they will peak at five percent.”
CEO of Octane Capital Jonathan Samuels said: "Despite the global banking wobble the message from the Bank of England is clear, they aren’t worried and their sights remain firmly set on bringing down inflation.
"This seems like the right call given that UK inflation is persistently higher than other advanced economies in the EU and the US. However, in seeking to reduce inflation through higher rates we can expect downward pressure on house prices to filter through as homeowners see their fixed rates end and they have to take out more expensive mortgages.”
The impact of Liz Truss' disastrous mini-budget in September is still being felt, with many homeowners opting for tracker mortgages afterwards as the prices of fixes went through the roof. In January Ian Rogers, company owner at south-Wales based C A Mortgage Services Ltd, told WalesOnline the outlook had improved since the mini-budget which temporarily saw fixed mortgage rates stuck at around 6% or higher.
Mr Rogers said he felt interest rates would "level out by the early summer" and that inflation would fall as 2023 went on. The Bank of England said it expects inflation to "fall significantly" in the second quarter of the year, although it will not fall to below its 2% target until at least 2024. But after a higher than expected inflation in March, it remains to be seen whether this will happen, and what impact it will have on interest rates and, consequentially, mortgages.
Will interest rates go down?
The Bank of England says putting up interest rates work by making it more expensive for people to borrow money to buy things. Higher interest rates also encourage people who can save to save rather than spend. But it has faced criticism from those who say continuously putting up rates heaps pressure on already-struggling households during a cost of living crisis, and is not the best way to bring down inflation.
While the recent increase in inflation came as a surprise, experts still forecast inflation to fall later this year. This is likely to have an impact on the decision to raise interest rates, with some experts suggesting Thursday's rise - which was smaller than previous rises - was the peak and that discussions on pausing it could follow in May. This should have a positive impact on mortgages. Many will be going back to fixes as trackers look less appealing as rates are going up while fixes come down, but with experts suggesting fixed interest rates will fall further in the months to come, it will be necessarily to contact a local broker a few months before your deal ends and look at how much you can afford right now, whether there are fees involved and other factors before making any decision. As ever, current economic predictions are uncertain, so there is no way to tell for sure which way inflation and interest rates will go in the coming months.
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