Base rate rises to 0.25% - what does this mean for your finances?

The Bank of England has raised base rate to 0.25% today, which will directly impact mortgage and savings interest rates.

Today is the first time in more than three years that the Bank of England has increased base rate, which has risen by 0.15% from its historic low of 0.10%.

The Bank of England’s decision to increase base rate took some finance experts by surprise, with many expecting a rate rise in February 2022. A reason for the rate rise could be in response to rising inflation, which yesterday’s figures revealed had increased to 5.1% during November and some experts now predict could reach 6% next April.

Laura Suter, head of personal finance at AJ Bell, said: “Rising inflation is the real reason behind this fast switch, with new figures out yesterday clearly causing a lot of concern at Threadneedle Street. The Bank has now increased its expectations for inflation and thinks it will hit 6% next April – which is unwelcome news for any household, which is no doubt already feeling the effects of rising prices and bills. While Omicron is still a worry for the Bank, rampant inflation is clearly an even bigger concern.”

Usually, mortgage lenders start to increase variable rates after a base rate rise fairly quickly. This means that those on their lender’s standard variable rate or a tracker mortgage could see their repayments increase within weeks.

Those locked into a fixed rate deal, which is the majority of mortgage borrowers, will not see any changes to their rate as it is ‘fixed’ for the term of the deal. When the term of the fixed rate deal ends, and unless they have negotiated a follow on deal with either their existing mortgage provider or a new lender, homeowners are automatically transferred onto the lender’s SVR, which is when they will be impacted by the base rate rise.

As Rachel Springall, finance expert at Moneyfactscompare.co.uk, explained: “Borrowers sitting on their standard variable rate (SVR) may see their rate rise within a month or perhaps within the next three months, depending on their lender. The difference between the average two-year fixed mortgage rate and SVR stands at 2.06%, and the cost savings to switch from 4.40% to 2.34% is a difference of £5,250 over two years* approximately. A rise of 0.15% on the current SVR of 4.40% would add £408* approximately onto monthly repayments over two years.”

Normally, variable rate savings accounts, including easy access savings accounts, will be the first to see any impact from a base rate rise.

Unlike mortgage lenders, however, who tend to pass on base rate rises, there is no guarantee that banks and building societies will pass on the increase to savers.

Springall said: “This base rate change may take a few months to trickle down to savers who have a variable rate deal, but there is also no guarantee the rate will be passed onto them in full, or at all. Should savers see 0.15% passed onto them, it would mean receiving £30 more a year in interest based on a £20,000 investment.

“It remains the case that savers need to act swiftly to take advantage of the best deals and, as some easy access accounts pay as little as 0.01%, hopefully this base rate rise will shake any saver’s apathy to look elsewhere. The biggest high street banks are unlikely to be matching base rate on their easy access accounts, so savers would be wise to reconsider their loyalty.”

*Average standard variable rate (SVR) is currently 4.40%. Calculations based on a £200,000 mortgage over a 25-year term on a repayment basis.