The Bank of England has upped the base rate for the third time since December as it attempts to keep a lid on soaring inflation.
The base rate has risen from 0.5 per cent to 0.75 per cent, having been previously upped from 0.1 per cent to 0.25 per cent in December and 0.25 per cent to 0.5 per cent last month.
The decision taken by the Monetary Policy Committee today was made due to inflationary pressures, although economists suggest it will do little to stem cost of living rises triggered by energy, petrol and food prices.
Savers will be hoping that base rate rise will mean they get better interest rates on their savings accounts, while most homeowners who have fixed rate mortgage deals won’t be affected immediately but are likely to find remortgaging in future more expensive.
Those with variable rate mortgages are likely to see monthly costs rise imminently.
The Bank of England has upped the base rate for the third time in three months as it attempts to keep a lid on soaring inflation.
Why raise interest rates?
With inflation at 5.5 per cent as of January and expected to peak over the coming months, the government’s 2 per cent inflation target is far from being met.
The base rate determines the interest rate the Bank of England pays to banks that hold money with it and influences the rates those banks charge people to borrow money.
By raising the cost of borrowing, monetary policy seeks to lower demand for it, which dampens the economy and the amount of money banks create in new loans.
A better return on savings also encourages people to put more money aside, but with rates near rock bottom the effect is negligible.
Savers will be hoping that the base rate will inject some much needed stimulus into the savings market, particularly given that rates have not risen by as much as some might have hoped, following the previous two base rate decisions.
Mortgage borrowers, similarly will be preparing for further rate hikes, with the Bank of England’s decision likely to drive up the cost of borrowing, which will arguably be felt most in the mortgage market.
What does the base rate rise mean for savers?
Only one in ten banks and building societies have passed on February’s Bank of England base rate rise to Britain’s long-suffering savers, according to analysis by Defaqto.
In fact it revealed that only 42 out of 99 savings providers have boosted rates for savers in the past six weeks, with many easy access accounts with top banks still sitting at 0.01 per cent.
The average easy access account has only risen by 0.05 per cent since December, according to Moneyfacts, from 0.2 to 0.25 per cent.
Those keeping an eye on the top of the savings best buy tables will have likely noticed some positive changes.
However, whilst the situation has barely improved for many savers, if at all, those who keep their cash with building societies and challenger banks will likely have seen some positive uplift.
All the major building societies barring Nationwide have passed on most if not all of the previous base rate rises to easy access savers.
Challenger banks, competing with one another at the top of the savings league tables have also kept the top deals ticking upwards.
Prior to the first base rate rise in December, the best paying easy access deal was with Investec paying 0.71 per cent, closely followed by Cynergy Bank paying 0.7 per cent.
Today, Cynergy Bank is paying 0.84 per cent, whilst 11 other providers are paying 0.7 per cent or more.
For those considering putting their money in a fixed rate savings deal, upwards movement has been more noticeable.
The average one year fixed rate has risen from 0.84 per cent to 0.97 per cent since 16 December, according to Moneyfacts.
Those keeping an eye on the savings best buy tables will have likely noticed some positive changes.
Prior to the December base rate rise, Gatehouse Bank was offering the best one-year deal paying 1.41 per cent, whilst Zopa Bank offered the best two-year deal paying 1.61 per cent.
Today, the best one-year deal has risen by 0.2 per cent, paying 1.61 per cent, whilst the best two-year deal has risen by 0.3 per cent, now paying 1.91 per cent.
So whilst a 0.25 per cent base rate rise is unlikely to send rates soaring, savers can expect to see more of the same over the coming weeks and months.
James Blower, founder of The Savings Guru said: ‘This will feed through to the savings market in a similar way as before – building societies will pass on a good chunk of this to savers, although I doubt Nationwide will.
‘Small banks competing with one another will nudge up best buy rates towards 0.9 per cent on easy access accounts.
‘Sadly I think we are a little way from a 1 per cent best buy, but I do think we will get to that point in the second half of 2022.’
Only 42 out of 99 savings providers have boosted rates for savers since the last base rate rise.
With the vast majority of savers seemingly unconcerned about whether their money is earning the best rate, the hope will be that as rates rise, people will become increasingly tempted to move their cash away from the big banks.
Nearly three quarters of the money in easy-access accounts earn a rate of 0.1 per cent or less, according to research by Paragon Bank
Furthermore, a huge £455billion is also sat in UK current accounts, with the typical balance of £5,600 generating an average interest rate of 0.06 per cent.
For savers fed up with a rock bottom rate, there is only one solution. Abandon ship and move your money elsewhere.
‘I can’t see the big clearing banks doing anything other than passing on the rate rise to mortgage borrowers in full and little or nothing to savers,’ said Blower.
‘It is imperative that savers with savings in these big banks switch to make the most of their money, rather than hope their bank will pass it on to them.’
Anna Bowes, co-founder of Savings Champion agrees with Blower.
‘Unfortunately savers can’t depend on their savings providers to pass these on if recent behaviour is anything to go by.
‘The good news is that there is still some competition among providers who are looking to attract new business by paying market leading rates, so it would be good to see rates climb back to levels seen before the pandemic at the very least.
‘So savers need to ditch those providers who are treating them badly and move their money into accounts paying the best rates.’
What does the base rate rise mean for mortgage borrowers?
The Bank of England’s decision will undoubtedly continue to drive up the cost of borrowing across the mortgage market.
Those on their lender’s standard variable rate, discount deals, or a base rate tracker mortgage are the only borrowers that will see their payments increase immediately.
This represents around 20 to 25 per cent of existing mortgage holders, depending on which estimate you look at.
Those with fixed rate deals will be protected for now, but will face the prospect of higher rates when they come to remortgage.
The average two year fixed rate deal has increased by 0.42 per cent since the first base rate rise in December, according to Moneyfacts.
David Hollingworth, associate director at L&C Mortgages said: ‘Although lenders don’t necessarily have to lift their standard variable rate by any base rate rise, borrowers should assume that is likely and many of the main lenders have followed the last two base rate hikes.
‘With living costs climbing there’s still a great opportunity for borrowers to take control of their biggest outgoing and lock down their mortgage rate.
‘ I expect that fixed rates will only grow in popularity as borrowers look to protect against further rises, especially in light of rising costs that they can do little about.’
Fixed rate mortgages, however, are on the rise so borrowers may be wise to fix in as soon as they can.
The average two year fixed rate deal has increased by 0.42 per cent since the first base rate rise in December, according to Moneyfacts, from 2.38 per cent to 2.8 per cent.
The average two-year deal for those requiring a mortgage covering 90 per cent of a property’s value has risen by 0.34 per cent from 2.55 per cent to 2.89 per cent during that time.
For equity rich homeowners the difference will be more noticeable. The average two-year deal for someone with 40 per cent equity or more in their property has risen by 0.55 per cent since 16 December, from 1.72 per cent to 2.27 per cent.
At the time of the first base rate rise on 16 December 2021, the cheapest two-year fixed rate deal for someone with either a 40 per cent deposit or equity was offered by Barclays paying 1.11 per cent with a £999 product fee.
As of today, the cheapest two year fixed rate deal for a mortgage covering 60 per cent of a property’s value is offered by Coventry paying 1.75 per cent with a £999 product fee.
This means someone with a 25-year £180,000 repayment mortgage on a £300,000 property eligible for the cheapest rate will be paying £741 a month today compared to £688 a month before the first base rate rise.
Those needing to remortgage this year are being advised to plan ahead and lock in a rate as soon as possible.
With further base rate rises expected as the Bank of England attempts to stem the inflationary surge, mortgage borrowers can expect mortgage rates to continue in an upward direction this year.
Those looking to buy over the coming months are being encouraged to lock in to longer fixed rate deals.
Longer term deals have on average seen less extreme rate hikes since the first base rate hike.
The average 5-year deal has increased by 0.31 per cent from 2.66 per cent to 2.97 per cent according to Moneyfacts.
In fact, those prepared to lock in for up to 10 years will typically be able to secure a cheaper deal than they would back in December.
The average 10-year fixed rate has actually dropped from 2.97 per cent to 2.9 per cent.
Swen Nicolaus, chief capital officer at Molo said: ‘For people who are looking to buy a house and are worried about how inflation will impact mortgage rates, we’d recommend exploring longer term fixed rate mortgage options.
‘While it’s difficult to predict when, where and how the impact of rising interest will set in for mortgage rates, a long term fixed rate can mitigate some of the risks and provide stability.’
Those needing to remortgage this year are being advised to plan ahead and lock in a rate as soon as possible.
David Hollingworth, associate director of L&C Mortgages said: ‘Anyone that is already in a fixed rate will have the benefit of being protected from the market movement and from the decisions around Base Rate.
‘That’s a positive but it makes sense for them to consider how long that fixed rate lasts for so they can diarise an appropriate time to review.
‘With some lender offers being valid for up to six months there is an opportunity for borrowers to start the process sooner than they think, which could prove beneficial if rates continue to push up.
‘In any case it is generally advisable to start at least three months before the end of the current deal as it allows time to not only get the mortgage offer but for the legal work to be conducted allowing for a smooth switch across and avoiding a period of reverting to the lender’s Standard Variable Rate.’
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