The UK's base rate of interest has been increased for the first time in a decade from 0.25% to 0.5% - here's everything you need to know about the decision
The Bank of England has today announced that the UK’s base rate of interest will increase by 0.25%, taking it up to a rate of 0.5%.
The decision was made by the UK’s Monetary Policy Committee (MPC), after a vote, which saw 7 out of 9 members voting to increase the base rate.
Interest rates have been at a low of 0.25% for over a year, after they were cut following the EU referendum. In fact, this is the first time the interest rate has been increased since 2007, when it was cut in response to the financial crash.
The reasons for the change
Mark Carney, the Governor of the Bank of England, has today said that the "modest change" to interest rates should help to curb the UK's growing rate of inflation. At the moment, the inflation rate is 3%, which is above the target of 2%.
When interest rates go up it makes it more expensive for people and businesses to borrow money. This makes saving more attractive, so people are a bit less likely to spend, helping to curb inflation.
The increase of 0.25% may seem like unfamiliar territory to many but a base interest rate of 0.5% is still a relatively low rate. But what does this actually mean for you and your wallet?
Mortgage rates will also increase
If you already have a mortgage, get familiar with the terms and conditions so you can see exactly how the news could affect you.
If you have a variable rate, or a tracker mortgage:
If you have a mortgage that tracks the base rate directly, your monthly payments will go up by 0.25%. If you're on a variable rate, most lenders will also pass on the increase to people. However, some lenders may absorb the extra cost themselves, so it’s definitely worth finding out what your mortgage provider intends to do.
Nationwide have already announced that they will pass on the full increase to their variable-rate mortgage holders (increasing rates by 0.25%).
Here's an example of how this might look for your finances. If you have a £175,000 mortgage, an increase of 0.25% adds up to an extra £22 a month. If you have a bigger mortgage of £400,000, for example, it's an extra £51 per month.
It could be worth seeing if you can remortgage onto a cheaper fixed rate mortgage. Here’s how to work out if remortgaging makes financial sense for you.
If you’re on a fixed rate mortgage:
Your monthly payments won’t be affected, but only until the end of your deal’s fixed term.
It could be worth getting on the front foot and looking for a new mortgage so you don’t revert to a pricey standard variable rate (SVR). This could be especially relevant if you’re nearing the end of your fixed term.
If you’re a first time buyer:
Mortgage providers have already started to respond to the change. Even before the announcement was official, the interest rates being offered on some new, fixed-rate mortgages have gone up, although only by a very small amount. Following the official announcement some providers may increase their rates further, while some will keep their rates steady to remain competitive.
Saving could become more rewarding
If you have savings tucked away, or you're looking to start saving, a rise in interest rates is good news. Many banks will pass on the hike in the form of higher interest rates on savings accounts, ISAs and other products, especially if you have an account with a variable interest rate. Although banks don't have to pass on the increase, it's likely many will.
Nationwide have said that savers whose rates were cut last August will now see their rates go back up to pre-Brexit levels. Yorkshire Building Society and TSB have also announced that they'll pass on the increase to savers.
The main impact of the news will be on mortgages and savings, but you can get a full run through of how the interest rate rise will affect all your finances in our article.
What are people saying about it?
The decision has sparked lots of conversation (even before it was officially announced) about what the change means, whether it’s a welcome change and what might happen next.
Talking about savers, the chief economist at KPMG has said that "long suffering savers will rejoice in today's news of a first rise in UK interest rates in over a decade."
But for those people who are already squeezed, there has been some concern, especially if rates continue to rise steadily in the future. For example, Luke Humphrey, from The Money Charity has expressed concern that the change could leave some people having to make the choice between personal debts and mortgage payments, saying:
"Somebody with both will have to prioritise between the two. That can lead to mortgages going in arrears and loans not being paid off. People who are juggling a lot of debt are going to find it a struggle."
But Peter Tutton from debt charity Step Change, has urged against overplaying the impact of the rise, saying that any future changes should hopefully happen slowly enough to allow people to adapt.
To help make sure you’re not caught out, put together a plan to help you cover any increased costs you face. You may need to cut down somewhere else to pick up the extra. If you do find yourself struggling, talk to someone sooner rather than later. For more information on dealing with debt, and who to go to, you can read our article.
This is the next big question in everyone’s minds. Is it a one-off or is it a signal that times are changing?
According to UK economist Paul Hollingsworth, the minutes of the meeting suggest that, while rates may continue to go up, it seems likely that there will only be two more hikes over the next three years. The Bank of England have also stressed that any future changes will be introduced slowly saying:
Whilst this change will have an impact for many people, the Bank of England's statement suggests they don't have plans for anything too drastic in the near future, giving you time to take stock, prepare and work out your next moves.