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Bank of England increases base rate to 0.5%

The Bank of England has raised the base rate for the first time in more than a decade. The Bank’s Monetary Policy Committee (MPC) voted by a majority of seven to two to increase the base rate to 0.5% from its historic low of 0.25%, bringing to an end months of speculation. While this increase is the first since July 2007, it marks a return to levels in place from March 2009 to August last year[1].

The news will come as a blow for mortgage holders on variable rate deals, but will be welcomed by savers who have suffered years of poor returns on their cash.

What is the Bank of England base rate?

When the Bank of England lends money to commercial lenders, the banks must pay interest at an amount determined by the base rate. The MPC meets each month to vote on whether the base rate should change. The decision is based on current economic circumstances, with the ultimate target of keeping inflation levels at 2%.

The base rate has been at a relatively low level since the financial crash – meaning it’s been cheaper to take out a loan or mortgage in the last nine years compared to previous decades. But with inflation hitting 3% last month[2], the MPC has decided the time is right to increase the base rate and stave off any further price growth.

How do interest rates affect mortgage holders?

If you’re on a variable rate mortgage[3] – such as a tracker[4] or discount[5] deal – a base rate change can affect your monthly repayments[6]. As banks face higher costs, they frequently pass these charges on to customers by increasing their standard variable rates (SVR).

While fixed-rate mortgage holders[7] are protected from a rate rise, taking out a new fixed-deal could also become more expensive, as the base rate affects ‘swap’ rates – the interest rates banks charge to each other. To find out more about how you could be affected, check out our new guide on the Bank of England base rate and your mortgage[8].

Will my mortgage get more expensive?

If you’re on a variable rate mortgage deal, it’s possible that your lender will increase its standard variable rate as a result of the base rate rise – meaning your monthly payments will also go up. Use our calculator to find out how an increase to your lender’s SVR may impact on your bills.

Base rate change good news for savers

While a rate change brings bad news for some mortgage holders, it will be music to the ears of savers. High inflation levels spell trouble for savers[9], who may struggle to find savings accounts offering interest that can offset rising prices. Ahead of today’s announcement, interest levels were already creeping up on some easy-access and Isa[10] accounts.

If you’re unsure whether to lock your savings up for a better deal or to keep your money moving, check out our guide on the different types of savings accounts[11].

References

  1. ^ August last year (www.which.co.uk)
  2. ^ inflation hitting 3% last month (www.which.co.uk)
  3. ^ variable rate mortgage (www.which.co.uk)
  4. ^ tracker (www.which.co.uk)
  5. ^ discount (www.which.co.uk)
  6. ^ affect your monthly repayments (www.which.co.uk)
  7. ^ fixed-rate mortgage holders (www.which.co.uk)
  8. ^ Bank of England base rate and your mortgage (www.which.co.uk)
  9. ^ spell trouble for savers (www.which.co.uk)
  10. ^ Isa (www.which.co.uk)
  11. ^ different types of savings accounts (www.which.co.uk)

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