Effect of the Bank of England Base Rate Increase

November 16th, 2017 | News | By Graham Wingar

The Bank of England have  increased interest rates for the first time in a decade in an attempt to curb inflation.

The Monetary Policy Committee voted 7-2 in favour of the increase from 0.25% to 0.5%. The minutes of the meeting also suggested that they do not expect a further increase any time soon, stating they are in “no hurry to raise interest rates again and that further increases will be limited”. Although increased, the interest rate still remains historically low as the Bank of England juggles inflation without putting too much stress too soon on borrowers.

The small increase will have little effect on lending and savings immediately, but it is an indication of the direction they are moving. Many home owners have been on very low levels of interest and it is important that they fully understand the implications of interest rates returning to levels close to those in the 2000’s. To put the new interest rate into context, between 2000 and 2007 interest rates were between 3.5% and 6%.

Mortgages

Many homeowners who are on fixed rate mortgages will not see any change in their monthly repayments.

*If you are the average homeowner with the typical variable mortgage in Britain of £175,000 on Nationwide’s base mortgage rate tracker – you will see your interest rise from 2.25% to 2.5%, taking the monthly bill from £763 to £785. A £22 per month increase.

**A study by the Halifax has shown that a rise in interest base rates from 0.25% to 2.25% would see the average variable mortgage cost go from around £680 to £840 per month. Although this level of increase is considerably higher than the 0.25% to 0.5% that the Bank of England have just announced.

Savings

Savers have been historically punished by the low rates of interest although some providers have now vowed to pass on the rate rise of 0.25% to their customers. Yet the best rates of return offered by most banks and building societies are around 1% – 2% which is still well below the current inflation rate of 3%, meaning savers will be suffering a real loss on their savings.

*Data from The Telegraph, November 2017

**Data from Halifax Plc, October 2017