Bank of England increases base rate to 2.25% – what the rise means for your mortgage and savings
The Bank of England has increased the base rate from 1.75% to 2.25% – the highest it has been in 14 years. This rate is used by the central bank to charge other banks and lenders when they borrow money – and so it influences what borrowers pay and what savers earn.
It's the seventh time in quick succession that the Bank has increased rates after it first lifted them to 0.25% from 0.1% in December last year.
But more rises are now expected after money market's were spooked on Friday following the Chancellor's mini-budget, where the biggest tax cuts for half a century were announced. The markets generally frown upon borrowing to cut taxes far more than for emergency one-off spending like energy bills.
All this pushed the Governor of the Bank of England, Andrew Bailey, to say on Monday that more rate hikes are on the way. The markets now working on the fact that the base rate could rise to nearly 6% by next Spring.
This has had a substantial impact on the mortgage market, prompting some big lenders, such as Virgin Money, Skipton, Halifax and Santander, to pull deals completely from the market, meaning less choice for mortgage switchers, while others have been replaced with more expensive deals.
The situation is fast moving, so see our detailed briefing on what's happening and what to do. If you have a mortgage and want to check what action your bank or building society is taking in response to last week's rise, see our mortgage providers table below. If you're a saver, we'll also be adding in responses from savings providers as we get them.
I have a mortgage. What happens now?
The vast majority of mortgage holders in the UK have a fixed-rate mortgage, so for most, nothing will change. The key points for mortgage holders are:
- Fixes are fixed. But sort a new deal soon if yours is coming to an end. As the name suggests, rates – and the amount you pay – WON'T change during the fixed period.
- Lenders MAY raise standard variable rate (SVR) or 'discount' mortgages. These move at the whim of lenders. You'll usually be on an SVR after your fix or tracker ends. A 'discount' mortgage, meanwhile, follows the SVR at a set rate, for example, if the SVR is 4% and the rate is SVR minus one percentage point, it's 3%.
- On a tracker mortgage? Rates will increase. As the name suggests, these 'track' the base rate, so mortgage costs will go up. In general, this latest rise means about a £23 increase in your monthly payments per £100,000 of mortgage.
What should I do with my mortgage?
What you should do depends on what sort of mortgage you have now and whether you're close to the end of your initial mortgage term:
- If you're on a fixed rate. Nothing will change with your existing deal, however, any new deal you remortgage to in future may now be more expensive. If you're close to the end of your current term, you might want to search for a new mortgage deal now. You can usually lock in a mortgage offer three to six months ahead of time.
If you've six months or longer to go on your fix, you'll either need to wait for your initial deal term to run out, or pay the charge to leave early.
- If you're on a standard variable rate (SVR) or 'discount' mortgage. If you're on the SVR, you're free to remortgage to a new deal at any time. It's worth checking if you can, as SVRs tend to be pricey.
If you're on a discount mortgage that has gone up, you may be able to remortgage without penalty, but do check. If not, you'll either need to wait for your initial deal term to run out, or pay the charge to leave early.
- If you're on a tracker mortgage. If you're concerned about this rise, or further rate rises, check now to see if you can switch to a better deal. However, do check if there are penalties to leave your current deal now – many trackers do have them. If not, then you're free to switch to another mortgage.
If you do have early repayment charges, you'll either need to wait for your initial deal term to run out, or pay the charge to leave early.
If looking for a new deal, see our Remortgage guide or First-time buyers' guide for help, plus our Mortgage Best Buys comparison tool for the top deals. And if you're in need of a mortgage broker, visit our Cheap mortgages guide for the full breakdown.
The base rate increase could affect all types of savings accounts. In general, savers benefit from base rate rises – though some high-street banks can be slow to pass increases on to customers, and new best-buy deals don't always emerge straightaway. We've asked all the main providers what their plans are and we've included any responses that we've received below:
- West Brom Building Society will increase rates by 0.5 percentage points on its savings tracker accounts from Wednesday 28 September, and is currently reviewing its variable rates.
Savers should wait a few days before switching
Whatever rate you're on currently, it may be worth waiting a few days to see if best-buy rates improve before switching – for a full round-up, see our daily updated Top savings guide. Our current top picks, which could change at any time, are:
- Up to 2.5% on easy access. Yorkshire Building Society pays a top rate of 2.5% and allows you to start saving from just £1.
- Up to 3.9% on a one-year fix. Investec is our top pick as it pays the top one-year fixed rate of 3.9%, but you'll need a minimum of £5,000 to open an account. If you have less to save, Oxbury Bank pays a lower rate of 3.65% and can be opened with a minimum of £1,000.