Nearly two million homeowners will see their mortgage repayments increase after the Bank Rate was hiked for the third time in four months.

Key takeaways

  • The Bank of England has increased interest rates for the third time in four months
  • The Bank Rate has risen from 0.5% to 0.75%
  • The change will add around £42 a month to repayments for someone with a £200,000 mortgage

The Bank of England has increased interest rates for the third time in four months as the cost of living continues to rise.

Its Monetary Policy Committee increased the Bank Rate from 0.5% to 0.75%, the highest level since February 2020.

It was the first time it has increased the official cost of borrowing in three consecutive meetings since 1997.

The move means around two million homeowners with variable rate mortgages will see their monthly repayments rise.

The change will add around £42 a month to repayments for someone with a £200,000 mortgage.

The latest increase heaps further pressure on homeowners, who are already suffering from steep increases in food, petrol and energy prices, while they will also have to pay higher National Insurance contributions from April.

Why is this happening?

Inflation, which measures increases to the cost of living, remains stubbornly high.

Consumer Prices Inflation – the key measure – is currently running at 5.5%, the highest level for 30 years, and the situation looks set to get worse with the war in Ukraine putting further pressure on the price of petrol, food and energy.

The Bank’s Monetary Policy Committee uses changes to interest rates as a way to control inflation.

But with inflation currently running significantly above its 2% target, there are likely to be further interest rate rises to come.

What does it mean for me?

You will only be impacted by the change in interest rates if you are on a variable rate mortgage, such as a tracker deal or your lender’s standard variable rate.

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

Around 850,000 people currently have a tracker mortgage, with a further 1.1 million on a standard variable rate one.

If you have a £200,000 variable rate mortgage, your monthly repayments will go up by around £42 a month as a result of the latest change, meaning your payments will cost an extra £108 a month as a result of the three interest rate rises seen since December.

Nearly three-quarters of homeowners with a mortgage are on fixed rate deals, and they will not see any change in their payments.

With a fixed rate mortgage, payments stay the same for the length of the deal, which is usually two or five years.

What should I do now?

If you have a fixed rate mortgage, you don’t need to do anything, as you will not be impacted by the change.

If you are currently on your lender’s standard variable rate, you should think about remortgaging on to a more competitive deal.

The average standard variable rate is currently 1.96% higher than the average two-year fixed rate deal. The difference in rates would cost you around £330 a month or nearly £4,000 a year if you have a £200,000 mortgage.

If you are on a tracker deal and want to protect yourself from further interest rate rises, you may want to consider moving to a fixed rate one.

But it is worth noting that the average interest rate charged on a two-year tracker mortgage is currently 2.03%, compared with 2.65% for a two-year fixed rate deal and 2.88% for a five-year fixed rate one.

If you have a tracker mortgage it is also important to check that you would not have to pay any earlier redemption penalties if you switch to a different mortgage before your term is up.

If you do decide to remortgage, you should be prepared to move fast.

Lenders withdrew a total of 518 deals during the past month, the biggest drop in mortgage availability since May 2020, during the early stages of the Covid-19 pandemic.

The average time for which different mortgage deals are available has also dived in the past month, dropping from 42 days to just 28 days, as lenders review and reprice their ranges.

But there is still plenty of choice, with more than 4,800 different deals to choose from.

If you think you may struggle to keep up with your mortgage repayments following the run of interest rate rises, 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.