The Bank of England has raised UK interest rates to their highest level for 14 years as it battles to stem soaring prices.
It increased them to 3.5% from 3%, marking the ninth time in a row it has hiked interest rates.
The rise will mean higher mortgage payments for some homeowners and those with loans at a time when many people are struggling with the cost of living.
It should also benefit savers, if banks pass on the higher rate to customers.
The Bank of England has been attempting to calm rising prices since the end of last year.
Inflation – the rate at which prices rise – has been increasing at its fastest rate for 40 years as the cost of food and energy soars.
Raising interest rates should, in theory, encourage people to borrow and spend less and save more. This should help bring down the rate of inflation.
Announcing its latest rise, the Bank indicated it was likely to continue to increase interest rates next year.
It means that homeowners with variable rate mortgages or first-time buyers looking to get on the property ladder could face higher costs.
Following the most recent rate rise, people on a typical tracker mortgage will pay about £49 more a month while homeowners with a standard variable rate mortgage face a £31 jump.
How high could interest rates go?
More rate rises are likely to come. Analysts suggest rates could reach 4.5% by the middle of next year.
How do interest rates affect me?
Just under a third of households have a mortgage, according to the government’s English Housing Survey.
After a period of ultra-low rates, many homeowners are now facing the likelihood of much more expensive monthly repayments. The Bank of England says about four million households face a higher monthly mortgage bill next year.
When interest rates rise, about 1.6 million people on tracker and variable rate deals usually see an immediate increase in their monthly payments.
An increase in the Bank rate from 3% to 3.5% would mean those on a typical tracker mortgage would pay about £49 more a month. Those on standard variable rate mortgages would face a £31 jump.
This would come on top of increases following the previous recent rate rises. Compared with pre-December 2021, average tracker mortgage customers would be paying about £333 more a month, and variable mortgage holders about £210 more.
Three-quarters of mortgage customers hold a fixed rate mortgage. Their monthly payments may not change immediately, but house buyers – or anyone seeking to remortgage – will have to pay a lot more now than if they had taken out the same mortgage a year ago.
What should I do about my mortgage?
With mortgage interest rates rising, speak to us. A good thing to do is look at a remortgage or product transfer. We can look at your situation and advise the best way to move forward based on your circumstances.
We can do this and lock in a mortgage deal 6 month before a fixed rate ends. If you are on a tracker or variable, its a good time to look at other options.
Call us on 0800 197 0504 or arrange a callback from a qualified mortgage broker.
My mortgage has gone up by £120′
Clive Turner, who works in customer services, is one of many borrowers hit by rising rates as their fixed rate mortgage deal comes to an end.
He and his partner were paying a rate of 3.48% before their five-year deal expired, amounting to payments of around £628 a month.
But the 48-year-old is now paying 5.76% on a new fixed-rate deal with payments of £750 a month – a £120 increase. His gas and electricity bills have also gone up, he said.
“I just wanted to fix it, take the hit, and hopefully at the end of the five years we will get something better,” he said.
Andrew Bailey, governor of the Bank of England, said: “I know that high interest rates have a real impact on people’s lives but by raising interest rates we can bring inflation down sooner.”
The Bank’s rate-setting committee expects inflation to fall “quite sharply” by the middle of next year. “Raising rates is the best way we have of making sure that happens,” Mr Bailey said.
The Bank of England has to balance increasing borrowing costs without causing the economy to slow too much.
The UK is already believed to be in recession due to the impact of soaring prices on businesses and consumers.
Why does increasing interest rates help lower inflation?
The Bank has been putting rates up to combat rising prices – known as inflation.
Prices have been going up quickly worldwide, as Covid restrictions eased and consumers spent more.
Many firms have problems getting enough goods to sell. And with more buyers chasing too few goods, prices have increased.
There has also been a very sharp rise in oil and gas costs – a problem made worse by Russia’s invasion of Ukraine.
Raising interest rates helps to control inflation by making it more expensive to borrow money. This encourages people to borrow and spend less, and save more.
However, it is a tough balancing act as the Bank does not want to slow the economy too much. The Bank is predicting that the UK could be in recession – a period of economic decline – for two years which is longer than we have seen in comparable statistics.
Are other countries raising their interest rates?
The UK is affected by prices rising across the globe. So there is a limit as to how effective UK interest rate rises will be.
However, other countries are taking a similar approach, and have also been raising interest rates.
The US central bank has announced big rate rises which have taken its key rate to levels not seen for nearly 15 years.
Other central banks around the world have also raised rates, as inflation continues to cause problems in a host of major economies.