Nearly 2m homeowners will face mortgage repayment increases of around £10 to £15 a month as the Bank Rate rises to 0.25%

The Bank of England has increased interest rates for the first time in more than three years.

The Bank Rate, otherwise known as the official cost of borrowing, has gone up from a record low of 0.1% to 0.25%.

The move by the Monetary Policy Committee (MPC) means nearly 2m homeowners will see their monthly mortgage repayments go up.

The change will add around £14 a month to repayments on a £200,000 mortgage.

But the majority of mortgage-holders will not be affected by the hike as they have fixed-rate loans.

Why are interest rates going up?

Inflation has reached a 10-year high, which is why interest rates are going up.

The MPC can move interest rates up or down to help manage inflation.

Inflation is the rate at which the things we buy are getting more expensive. It is measured by the Consumer Prices Index.

Inflation reached 5.1% in November, more than double the Bank of England’s 2% target.

Raising interest rates helps to cool inflation by making it more expensive to borrow money.

Higher interest rates discourage individuals and businesses from spending, which causes the economy to slow and price rises (inflation) to ease.

Will my mortgage payments go up?

Some mortgages move up and down in line with changes to the Bank Rate.

These mortgages might be tracker deals or the standard variable rates that borrowers revert to once a fixed-rate deal ends.

As a result, any borrowers on one of these home loans are likely to see the cost of their monthly repayments go up. But the increases will not be large.

Mortgage trade body UK Finance estimates the 850,000 people with a tracker mortgage will see their monthly repayments rise by an average of £15.45.

Meanwhile, the 1.1m borrowers on a standard variable rate will face an increase of £9.58 per month.

But the majority of mortgage-holders will not see any change. This is because 74% of mortgage-holders are on fixed rate deals.

Under a fixed-rate deal the interest rate you pay stays the same for the length of the product – typically two or five years.

What’s the wider impact of interest rate rises?

There was some but not a lot of surprise that the Bank Rate went up to 0.25%.

Despite the economic uncertainty created by the omicron variant, the MPC had been expected to raise the official cost of borrowing from its record low level.

As a result, many mortgage lenders had already priced in a possible increase into the interest rates they were offering on new deals.

This, combined with the fact that the Bank Rate only increased by 0.15%, means the cost of new mortgage deals is unlikely to shoot up in the near future.

That said, economists are expecting further rate hikes in 2022, with some predicting the official cost of borrowing could end the year as high as 1%.

Mortgage rates are expected to trend up during the coming 12 months. But strong competition in the market means rates are likely to remain relatively low.

If you’re currently thinking of remortgaging, it makes sense to do so sooner rather than later.

The interest rate increase is expected to have only a very limited impact on the housing market more broadly.

The cost of borrowing is only one of the factors that affects house price growth, and interest rates are still very low by historical standards.

Strong demand from buyers, high levels of employment and a shortage of homes for sale is likely to continue to put upward pressure on property prices.