Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Looking at the Bank of England’s latest decision and the impact it will have

The Bank of England has increased interest rates for the third time in four months, taking the Base Rate to 0.75%. The Monetary Policy Committee, who decide whether rates will be increased or not, voted 8-1 in favour of a rise from 0.5% to 0.75%.

The rate decision will have a big impact on anyone with a mortgage and cash savers. Let’s look at how it affects them.

Mortgage borrowers

Anyone on a variable rate mortgage will see their interest rates go up. Trade body UK Finance estimates that about two million households will see an immediate increase in their mortgage payments. The increase from 0.5% up to 0.75% will mean someone with a £250,000 variable rate mortgage will pay an extra £384 a year. (Assumes a repayment mortgage with a 25-year term, at the current average variable rate of 2.47%, based on BoE figures.) With higher borrowing of £450,000 the increase is more dramatic, with those homeowners having to pay an extra £684 a year.

But mortgage holders on a variable rate should be braced for even higher bills. The current market expectations are that the base rate will rise four more times this year, taking it to around 1.75% before the end of 2022. If this is the case, homeowners with £250,000 of borrowing will have to pay an extra £1,956 a year, or £163 a month, while those with £450,000 of borrowing will have to find an extra £3,528 a year, compared to when Base Rate was 0.5% – which is a lot of spare cash to find when so many other costs are already rising.

Anyone who wants to beat these price hikes can fix their mortgage rate to get a better deal, although they need to be quick to beat further increases by mortgage companies. But the potential savings are big. Someone with a £250,000 mortgage who is currently on the average variable rate could save £4,184 over the next two years by switching to the current top two-year fix, which is 0.99% from Furness Building Society. If you fix your mortgage rate for longer you’ll get a slightly higher rate, but save more over the longer term.


Interest rate rises are good news for cash savers. As a result of the past two interest rate hikes we’ve seen the top easy-access savings account rate rise from 0.65% ahead of the December rate increase to the current 1%, based on data from Moneyfacts.

However, anyone who wants to access these higher rates needs to hunt around for a better deal – it won’t just be handed to them. Lots of people’s savings are just sitting in their current account or old savings account, earning 0.01% – and these people likely won’t see an increase in the interest rate they’re being paid.

One area savers need to be wary of is fixing their savings rate for a year or more. By fixing savers can access higher rates, for example the current top two-year fix pays 1.9%, based on data from Moneyfacts, which is almost double the top easy-access rate.

But savers need to seriously consider what interest rates will do in that two-year period and if that deal will look attractive in a year or two’s time. While nothing is certain, markets are expecting more increases this year and for rates to be sitting at around 1.75% by the end of 2022. If that’s the case we’ll see the interest offered on fixed rate accounts rise and anyone who has already fixed won’t be able to benefit from those rises.

‹ Previous2022-03-24Next ›