Nearly two million homeowners will face higher mortgage repayments after the Bank of England increased interest rates for the fifth consecutive time.

The Bank of England has increased interest rates for the fifth consecutive time, lifting the official cost of borrowing to a 13-year high.

Its Monetary Policy Committee increased the Bank Rate from 1% to 1.25% as it continues to battle the rising cost of living.

Three members of the committee voted to raise interest rates by an even more aggressive 0.5%, suggesting there will still be further increases to come.

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

The latest increase will add around £24 a month to a £200,000 mortgage, bringing the cumulative increase since rates first started to rise to £114 a month.

It comes at a time when consumers are already suffering from steep increases in food, petrol and energy costs.

Why is this happening?

Like many central banks around the world, the Bank of England is increasing interest rates in a bid to control inflation, which measures rises to the cost of living.

Inflation as measured by the Consumer Prices Index is currently running at 9%, its highest level for 40 years, and it is expected to hit 11% later this year.

To put this in context, the Bank of England is supposed to keep inflation at around 2%.

High inflation is currently a global problem due to a combination of high energy and fuel prices, which impact the cost of goods, disruption to the supply chain caused by Covid-19 and the conflict in Ukraine.
Who does it affect?

Not everyone will be impacted by the latest increase.

Nearly three-quarters of homeowners have a fixed rate mortgage, and they will not see any change to their monthly repayments until their current deal ends.

But the news is less good for those with a variable rate mortgage.

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

These homeowners will see their monthly repayments increase by around £24 a month if they have a £200,000 mortgage, adding to the previous increases they have already seen since December.
What should I do now?

If you are coming to the end of a fixed rate mortgage, start looking for a new deal now.

Although the interest rate rises seen since December will already have been priced into new deals, further increases are expected in the months ahead.

You can ‘book’ a mortgage offer up to six months in advance of your current deal ending.

With rates only heading in one direction, try to line up a new deal as soon as possible.

You should also look for a new mortgage of you are currently on your lender’s standard variable rate.

The average interest rate charged on standard variable rates is currently 4.91%, meaning you could save £189 a month if you switch to a typical two-year fixed rate product of 3.25%, based on a £200,000 mortgage.

If you are on a tracker deal, which moves up and down in line with changes to the Bank Rate, it may not be possible to remortgage without paying early redemption penalties.

Check with your lender to find out if this is the case. If you can exit your current deal without penalties, you may want to consider remortgaging onto a fixed rate deal to protect yourself from further interest rate rises.

Economists are predicting the Bank Rate could rise to 3% next year.

If you are struggling to pay your mortgage, contact your lender as soon as possible.

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

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

Key takeaways

  • The Bank of England has increased interest rates five times in a row, lifting the official cost of borrowing to a 13-year high
  • Yesterday, the Bank Rate increased from 1% to 1.25% , increasing monthly repayments by around £24 a month for someone with a £200,000 mortgage
  • If you’re on a standard variable rate or tracker mortgage, it’s a good idea to fix now, as interest rates are likely to go up again over the coming months