Someone with a £200,000 mortgage will have to pay an additional £50 a month in repayments.
There are approximately 850,000 people with tracker mortgages and 1.1 million with standard variable rates.
First-time buyers are also hurt by the latest rate increase, as higher interest rates reduce their borrowing power.
In order to remain affordable, first-time buyers will need an additional £12,250 a year in income with the increase from a 2% to a 4% mortgage rate.
What happens next?
In an effort to combat high inflation, the Monetary Policy Committee (MPC) has now raised interest rates by 2.15% since December last year.
Despite a slight dip in inflation to 9.9% in August, the MPC warned that it had not yet peaked.
In October, it expects inflation to reach a high of 11% as measured by the Consumer Prices Index.
Due to Prime Minister Liz Truss’ energy price freeze, the peak would be lower and earlier than previously thought.
The mini-Budget tomorrow is expected to announce energy price freezes and other measures which will lead to inflation remaining higher for longer. MPC may have to increase the Bank Rate more than expected.
While five members of the MPC voted to raise the Bank Rate by 0.5%, three members wanted to raise it by 0.75%.Therefore, interest rates are widely expected to be increased again in the near future.
In the final part of this year, the housing market is likely to start slowing sharply due to a recession coupled with rising mortgage rates and living costs.
It is expected that a stamp duty cut in the government’s mini-Budget will lead to a pickup in demand, supporting house prices.
In this situation, what should I do?
If you are on your lender’s standard variable rate (SVR), the rate you are automatically put on when your mortgage deal ends, you should remortgage as soon as possible.
Prior to the latest interest rate hike, the average rate charged on SVR mortgages was already 5.4%, its highest level in over a decade.
Even though other mortgage rates have been rising steadily since December, you could still save £136 a month by switching to a two-year fixed rate of 4.24%.
Those coming off fixed rate deals should expect an increase in monthly repayments.
Two years ago, the average interest rate charged on a two-year fixed rate mortgage was 2.24%. Now it is 4.24%, meaning someone with a £200,000 mortgage would see a £217 increase in monthly payments.
The average rate on a five-year fixed rate has risen from 2.77% to 4.33% since the last remortgage, resulting in a monthly increase of £171.
Those with tracker mortgages, which move up and down depending on the Bank Rate, and those on fixed rate deals with more than six months left have a more difficult time deciding whether to remortgage.
Before deciding whether to exit your current deal early, find out if you will be penalised if you do so.
Additionally, you should consider whether it would be better to switch to a new mortgage now, which will likely have a higher interest rate than your current one, or wait until it ends but accept that mortgage rates will likely have increased again by then.