You and your finances: What you need to know about interest rates

In an effort to slow the price rise, the Bank of England has raised interest rates for a 12th consecutive time.

During the meeting of the Monetary Policy Committee, the Bank rate was raised to 4.5% from 4.25%.

It will cause further pain to some homeowners, but it could benefit savers as well.

Is there a limit to how high interest rates can go?

As a result of the soaring cost of living, the Bank rate is at its highest level in almost 15 years. There has been persistently high inflation, due in part to the fastest rise in food prices in 45 years.

As of March, the rate stood at 10.1%, down slightly from 10.4% in February, but the same as in January.

In an effort to control inflation, the Bank of England has raised rates several times since December 2021.

The coming months will bring uncertainty, especially regarding whether rate hikes may be coming to an end. According to some economists, there could be another one or two rises.

As the economy shows little sign of growth, the Bank will be careful not to dampen it.

After the turmoil of last year’s mini-budget, the peak would still be lower than expected.

Despite a target of keeping inflation at 2%, the central bank has been forced to raise rates because prices are rising more than five times that.

How do interest rates affect me?

Getting a mortgage

According to the English Housing Survey, just under a third of households have a mortgage.

In the wake of ultra-low interest rates, many homeowners are now facing much higher monthly payments. Approximately four million households will have higher mortgage bills this year, according to the Bank of England. It is estimated that 356,000 mortgage borrowers may experience repayment difficulties by July next year, according to the Financial Conduct Authority.

Over 1.4 million people on tracker and variable rate deals usually experience an immediate increase in their monthly payments when interest rates rise.

Tracker mortgages will cost about £24 more a month after the Bank rate increases to 4.5% from 4.25%. There will be a £15 jump for those with standard variable rate mortgages.

In addition to recent rate rises, this is the third increase in a row. The average tracker mortgage customer will be paying about £417 more a month than they did prior to December 2021, and the average variable rate mortgage customer will be paying about £266 more a month.

There is a significant degree of uncertainty about the prospect of them coming down again as the year goes on.

The majority of mortgage customers have fixed-rate mortgages. The monthly payment for house buyers, or those remortgaging this year, is likely to be substantially higher than if they had taken out the same mortgage a year or more earlier.

Despite most of the policies announced in September’s mini-budget being scrapped, this market has been undergoing considerable upheaval.

For a typical borrower, an average two-year fixed deal is now 5.28%, up from 2.29% in November 2021 – potentially hundreds of pounds in monthly payments. In spite of this, rates are lower now than they were at their peak in the autumn, when fixed rates would have been most expensive.

Will the Bank Rate rise cause house prices to drop further?

Our predictions for house prices haven’t changed with today’s Bank Rate rise. 

We think UK house prices will be 1% lower on average than today by the end of 2023. With mortgage rates set to remain higher than in the past, house price growth is going to be much lower than in recent years, with prices rising more slowly than earnings.