The UK Bank Rate has risen to 3% from 2.25% in the biggest single increase for 33 years. Here’s what it means for you and your home.

The Bank of England has increased interest rates by 0.75% – the biggest single increase since 1989, apart from the almost immediately reversed rise on Black Wednesday in 1992.

The Bank Rate is now at 3%, its highest level since 2008.

It was the eighth meeting in a row at which the Monetary Policy Committee (MPC) has increased the official cost of borrowing, as it continues to battle high inflation.

The move adds around £86 a month to repayments for someone with a £200,000 variable rate mortgage.

The increase will impact the estimated 850,000 people who have a tracker mortgage, and the 1.1 million who are on their lender’s standard variable rate, both of which move up and down in line with the Bank Rate.

Homeowners with variable rate mortgages have now seen their mortgage payments rise by more than £300 a month since December, at a time when they are also grappling with steep increases to the cost of living.

“Money markets were expecting a hefty jump in the Bank Rate”

Director of Research and Insight at Zoopla, said: “Money markets were expecting a hefty jump in the Bank Rate today. Most borrowers used fixed rate loans so it’s the cost of 2 and 5 year fixed rate money for banks that underpins mortgage rates more than the base rate.

“Today’s jump does not worsen the outlook for mortgage borrowers but home buyers need to realise that 4% to 5% mortgages are set to be the norm in future, not the 1% to 2% of recent years.”

What’s going to happen to the housing market in 2023?

Why has the Bank Rate been increased?

The MPC has increased the Bank Rate by 2.9% since it first started to raise the official cost of borrowing in December last year, in a bid to bring inflation down.

Despite these increases, inflation – which measures the rate at which the cost of goods and services is rising – has remained stubbornly high at 10.1%.

The MPC’s job has been made significantly harder by former Chancellor Kwasi Kwarteng’s mini budget.

The markets were spooked by his plans to cut taxes and increase spending, leading to a steep drop in the value of the pound. This in turn made imports more expensive, and was expected to push inflation higher.

It also impacted the housing market, with the number of people looking to buy a home dropping by a third in the wake of the mini budget.

In the minutes on its latest meeting, the MPC warned that “further increases in Bank Rate may be required” in order to get inflation back down to its 2% target.

But there was some good news for homeowners, with the MPC adding that interest rates were likely to peak at a lower level than was being predicted by the financial markets.

Economists had previously expected interest rates to have to increase to around 5% by the middle of next year, but they have since trimmed their forecasts to 4.25%.

What should I do about my mortgage?

If you are on a fixed rate mortgage

If you are on a fixed rate mortgage you don’t need to do anything right away. The interest rate you are paying will stay the same until the end of your product term, usually two or five years.

If you are coming to the end of your deal, you should start thinking about your next one.

Most lenders will allow you to ‘book’ a new rate between three and six months before your current one ends.

But you need to be prepared for a significant increase in your monthly repayments, as interest rates are now likely to be much higher than they were when you took out your mortgage or last remortgaged.

Mortgage rates could fall slightly towards the end of this year and early next year as markets stabilise, so you may want to wait to see if this happens before committing to a new rate.

Mortgage rates expected to fall in 2023

But there is no guarantee that rates will fall, and the MPC could increase the Base Rate further at its December meeting.

If you are on a standard variable rate (SVR) mortgage

If you are on your lender’s standard variable rate (SVR), the rate you are automatically put on when your mortgage deal ends, you may want to remortgage soon.

The average interest rate charged on SVR mortgages was already 5.86% before the latest interest rate hike, its highest level for more than a decade, and it is likely to increase by a further 0.75% following today’s Bank Rate increase.

That said, if you are comfortable sitting on a higher rate for a couple of months, you may want to delay remortgaging to see whether rates do come down.

If you are on a tracker mortgage

If you are on a tracker mortgage, which moves up and down in line with changes to the Bank Rate, you may want to stay put.

Although the Bank Rate is widely expected to rise further, interest rates charged on fixed rate mortgages have already factored in some of these anticipated increases.

As a result, the average cost of a two year fixed rate mortgage is currently 6.47%, while interest charged on a five-year deal is only slightly lower at 6.32%.

It is important to remember that if you take out a fixed rate deal, you will be locking into the current high interest rates for two or five years, depending on which product term you opt for.

How can I reduce my mortgage repayments?

If you are worried about the increase in your monthly repayments that you might face when you come to remortgage, there are steps you can take to reduce them.

One way to lower your repayments is to borrow less. While this may be easier said than done, if you have a good level of savings, you may want to think about using some of the money you have set aside to make a lump sum overpayment to reduce the size of your mortgage.

You can also reduce your monthly repayments by increasing your mortgage term.

For example, monthly repayments on a £200,000 mortgage on a fixed rate of 6% would be £1,450 if the mortgage was being repaid over 20 years.

But monthly repayments would fall to £1,210 if the term was increased to 30 years, and to £1,150 if it was being repaid over 35 years.

But it is important to bear in mind that increasing your mortgage term will mean  you pay more in interest over the entire life of your mortgage.

It is also worth remembering that although interest rates have increased, the value of your home is also likely to have gone up since you last remortgaged.

As a result, you will be borrowing a lower proportion of your property’s value than previously, known as the loan-to-value (LTV) ratio.

Lenders offer their most competitive rates to people with lower LTVs, so you may now qualify for a better rate than previously.

What should I do if I’m struggling to pay my mortgage?

If you are struggling to keep up with your mortgage repayments, or think you may do so in the near future, it is important to contact your lender as soon as possible.

There are a number of steps lenders can take to help you, including granting you a temporary payment holiday or putting you on to an interest-only mortgage for a short time.

But options become much more limited if you have already missed a payment.

Lenders are obliged by the regulator to work with customers who are struggling with mortgage repayments to find a solution, and they can only repossess a home as a last resort.

Key takeaways

  • The Bank of England has increased interest rates by 0.75% – the biggest single increase in 3 decades
  • The hike leaves the Bank Rate at 3%, its highest level since 2008
  • It does not significantly worsen the outlook for mortgage borrowers, but home buyers need to realise that 4% to 5% mortgages are set to be the norm in future