How will the Bank of England base rate rise affect homeowners?

The Bank of England has increased interest rates to their highest level for nearly 10 years after the summer heatwave helped the economy bounce back from a snow-hit start to the year.

How will the rates rise affect homeowners? Picture: TSPL
How will the rates rise affect homeowners? Picture: TSPL

The move is the first time rates have risen above 0.5 per cent since March 2009, when they were slashed to emergency lows to contain the fallout from the financial crisis.

Why is the Bank set to raise rates?

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The Bank has been signalling for some time that rates will need to rise to cool inflation, which surged after the Brexit vote sent the pound plunging and still remains above target, at 2.4 per cent.

It also wants to see rates come off the emergency lows that have been in place ever since March 2009 and return to more “normal” levels.

How will this affect homeowners around the country?

It will come as a blow to millions of mortgage borrowers on variable rate deals, with a quarter point rise adding around £16 a month and £190 a year to the average mortgage.

However, it will offer some relief to savers who have seen their nest eggs decimated by above-target inflation and negligible returns.

Many home owners are also locked into fixed-rate mortgages, and so will not feel an immediate impact from a base rate rise.

And at 0.75 per cent , rates would still be very low by historical standards, given that the base rate stood at more than 5 per cent when the credit crisis and subsequent global financial crisis hit.

However, the base rate rise will be keenly felt by households walking a “budget tightrope”, experts have warned, and for those used to years of low rates it could feel particularly pronounced.

For many millennials, the base rate rise will be the first taste they have had in their adult lives of a figure above 0.5 per cent .

At 0.75 per cent , the rate is at its highest since 2009.

The move spells rising costs for borrowers, and it comes a week after Office for National Statistics (ONS) figures showed households became net borrowers last year for the first time in nearly 30 years.

Households across the UK spent or invested around £900 more on average than they received in income during 2017, according to the ONS.

Phil Andrew, chief executive at StepChange Debt Charity, said: “Whilst a rise in interest rates might be right for the wider economy, from a consumer debt perspective many households are walking a precarious budget tightrope, as their incomes don’t stretch to cover the basics each month.

“These are the households that a rate rise will affect most. Policymakers mustn’t lose sight of what a rate rise means for real people on a tight budget.”

Many mortgage borrowers will not immediately feel the impact of rising rates, as they are locked into fixed-rate deals, but experts said further rises could limit the number of households accessing mortgage finance, dampening house price growth.According to research from Savills, since 2009 lenders have gradually cut their mortgage rates to bring them close to the base rate.

Savills said: “As a result, mortgage debt is now cheaper than it has been at any point in the last 20 years. If lenders translate the base rate rise directly to their mortgage lending rates, that would still only bring them back to 2016 levels.

“However, this is unlikely to be the last time we see the Bank of England raise base rates.

“As rates rise further, it will become more difficult for households to pass the affordability stress tests they must now take to secure a mortgage. That will limit the number of households able to access mortgage finance, dampening house price inflation.”

How much will the rate rises cost the average person?

Calculations by UK Finance suggest a 0.25 percentage point base rate rise passed on in full to borrowers could add around £16 to monthly repayments for those on tracker rates and around £12 on an SVR, based on typical amounts outstanding.

Andrew Montlake, director at Coreco Mortgage Brokers, said: “Although on the face of it a rise of just 0.25 per cent is not a massive change, this would still be the highest rates have been since 2009, and with consumers used to a decade of low interest rates it may feel more pronounced than usual.

“For borrowers worried about the rate rise, the important thing is not to panic and to speak to your lender or a professional mortgage adviser straight away if you think there could be any issues.

“It may be that you can lock into a fixed rate sooner than you think, or it may even be worth breaking your current product early, paying the penalties and switching to a new rate, dependent on your circumstances.”

Where will rates go from here?

Most economists believe a rate rise this month would be the only one in 2018, with the next one not due until at least February 2019.

Investec predicts a quarter point rise every six months until rates reach 1.5 per cent in 2020.

But Mr Carney and the MPC have been careful to stress repeatedly that any rises will be “gradual” and “limited” and not see rates increase to the high levels seen in the past.

What about Brexit?

The Brexit negotiations and uncertainty over the deal - and indeed, any deal - being in place by the UK’s withdrawal from the EU next March casts a cloud over the outlook for the economy and rates.

The National Institute of Economic and Social Research (Niesr) warned on Wednesday that the Bank should raise interest rates on Thursday, but “stand ready” to reverse the hike if circumstances change.

The influential think tank said: “The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions.”

What are banks and building societies saying?

While deals directly tied to the base rate will change, several providers have said they are still mulling over how they plan to apply the base rate increase to other products - leaving many savers holding their breath.

Here is what providers have said so far:

RBS - The Royal Bank of Scotland, NatWest and Ulster Bank North base rate has also increased from 0.5 per cent to 0.75 per cent . For those customers on base rate-linked products, it will increase their rate to 0.75 per cent .

Around two thirds of its mortgage customers are currently on fixed-rate products and so will not see their rate change during their fixed-rate period.

RBS said it is reviewing whether it will make any changes to variable rate products “and will provide an update in the near future”.

Lloyds Banking Group (includes Halifax) - All products that track the Bank of England base rate will be increased by 0.25 per cent from September.

Lloyds said: “The 0.25 per cent Bank of England base rate increase will form part of the ongoing rate reviews across our product ranges.”

Santander - It is reviewing the pricing of all of its variable rates that are not linked to the base rate.

All tracker mortgage products linked to the base rate, including Santander’s follow-on rate, will move in line with the change. These new rates will be communicated to customers and used to calculate mortgage repayments from the start of September.

All loans to UK businesses linked to the base rate will move in line with the change and in accordance with the terms of the deal.

All savings products linked to the base rate will move in line with the increase from the end of August.

A Santander spokesman said: “When we review rates, we consider both the interest we charge for borrowing money, and the rate of interest we can offer on deposits.”

HSBC - Tracker mortgages will go up on Friday in line with the base rate. Other mortgage rates and savings will be reviewed in light of the Bank of England’s decision.

A spokesman for HSBC UK said: “While our savings rates are not directly linked to the Bank of England base rate, we will be reviewing these in light of this decision and other factors, and will make our customers aware of changes in savings rates at the earliest opportunity.”

He said: “Tracker mortgage customers who wish to get a bespoke idea of what a rate rise means for their individual circumstances should click on our interest rate change calculator.

“We will be reviewing other variable rate mortgages, including our standard variable rate, following this decision, and we will communicate to those customers impacted, with notice given in line with their mortgage terms and conditions.”

Nationwide Building Society - Nationwide said it is working through what this may mean for its savings, mortgage and banking members and it will be communicating any changes in due course.

Yorkshire Building Society - A spokeswoman for the Yorkshire said: “We will take time to consider how to adjust our variable rate mortgage and saving accounts.

“As a mutual which is owned by its members, it is our priority to deliver highly competitive and sustainable rates for both our savers and borrowers.”