Answer: The Bank of England has once again deployed its main weapon in the battle against surging inflation: a base rate increase. Last Thursday saw the base rate rise from 2.25 per cent to 3 per cent, marking the eighth increase in the space of a year and the biggest single hike in 33 years.

A higher base rate makes it more expensive for banks to borrow, which in turn makes it more expensive for us to borrow from our banks – though it also makes it more rewarding for us to save. The idea is that we will spend less as a result and this muted demand will mean more muted price rises, helping to bring inflation back under control.

While the Bank of England hopes that this will ultimately benefit the economy, the recent flurry of base rate hikes have in many cases had a huge and worrying impact at an individual level. Some mortgage customers have seen their monthly repayments rocket by hundreds of pounds over the past few months.

The Bank of England has announced its biggest interest rate increase in three decades as it tries to beat back stubbornly high inflation.

Those on a tracker or variable rate mortgage see costs go up directly in line with the base rate: the latest 0.75 percentage point rise in the base rate translates to an extra £100 a month in repayments if you’re borrowing £250,000.

If you’re on a fixed mortgage, your repayments are set for the duration, so a change to the base rate won’t make a difference to you if you’re still mid-deal. But those with a cheap fixed deal that has come to an end in recent months have faced a nasty financial shock when looking to remortgage.

For context, in November 2020, when the base rate stood at just 0.1 per cent, the average rate on a two-year fixed mortgage was 2.43 per cent. This meant that borrowing £200,000 over 25 years would cost £890 a month. In October 2022, the average two-year fixed rate had jumped to 5.43 per cent – so monthly repayments on the same £200,000 mortgage would be £1,220. If you’re in the market for a two-year fixed deal now, you’re looking at an average rate of 6.47 per cent – that takes monthly repayments in this scenario to £1,347.

This latest base rate rise had largely been factored in by lenders, so there haven’t been huge overnight hikes in prices for people looking for a new mortgage deal. But the fact remains that fixed deals today are much more expensive than they have been in the past few years.

With rates likely to remain high for the foreseeable, be sure to shop around for a new deal if you’re close to the end of your fixed term – you can usually secure a new mortgage six months before your existing one ends.

If you’re more than six months away, sit tight. Switching deals mid-term usually comes with hefty charges, so is best avoided. If you want advice on the best course of action, speak to a mortgage broker. And if you’re worried about not being able to keep up with repayments, speak to your lender to find out what support it can offer.

For savers, the impact of recent base rate rises has been much more positive. According to financial data provider Moneyfacts, the average rate on an easy-access account has surpassed 1 per cent for the first time in a decade, while the most competitive accounts pay over 2.5 per cent. If you’re prepared to lock your money up for a year, you can earn more than 4 per cent.

Unfortunately, banks are generally far quicker to pass on rate rises to mortgage customers than to savers. According to Moneyfacts, one high street bank has only increased its easy access rate by 0.14 per cent since December 2021, during which time the base rate has risen from 0.1 to 3 per cent.

If you haven’t reviewed your savings for a while, now’s the time to shop around and take advantage of a market that’s more competitive than it’s been in years.

Jenny Ross is Money Editor for Which?

Smart Money: Interest rate rise is bad news for borrowers, but more positive for savers - Jenny Ross

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