The Bank of England has increased the base rate from 3.75% to 4%, the first rise in more than three years.
The decision was widely expected. The Monetary Policy Committee voted by eight to one for the 0.25 percentage-point increase, with one member preferring a larger rise to 4.25%. The Bank cited rising energy costs and inflationary pressure, with inflation expected to reach around 5% by the middle of 2027.
Naturally, whenever the base rate changes, people start asking us what it means for their mortgage.
The slightly unhelpful answer is: It depends.
But the more useful answer is that, for most mortgage borrowers, today's announcement may make less immediate difference than the headlines suggest. Our MD of Financial Services, Stephanie Woodward explains:
Why the base rate and fixed mortgage rates don't move together
It is easy to assume that if the base rate rises by 0.25%, every mortgage rate will immediately rise by the same amount. That is not how most fixed-rate mortgages are priced.
Lenders look ahead when setting fixed rates. They consider what financial markets expect interest rates to do over the next two, five or more years, alongside their funding costs, risk appetite and competition from other lenders.
In simple terms, banks and building societies do not usually wait for the Bank of England to make an announcement before doing the maths. Today's increase was widely anticipated, so much of it had already been reflected in the market. Mortgage lenders had been adjusting fixed rates ahead of the decision.
This creates the slightly odd possibility that the base rate can rise while some fixed mortgage rates remain unchanged, or even fall. That can happen if the increase is smaller than markets feared, or if investors become less pessimistic about where rates are heading next.
So the headline is important, but it is not the whole story.
If you're already on a fixed rate
For most of our mortgage clients, today's announcement changes nothing immediately.
If you have a fixed-rate mortgage, your interest rate and monthly payment should remain the same until the fixed period ends, assuming you make no other changes to the mortgage.
The more important question is: When does your current deal finish?
If your fixed rate ends within the next few months, it may be sensible to start reviewing your options now rather than waiting for the lender's standard variable rate to appear on your statement.
Depending on the lender and product, it may be possible to secure a new mortgage offer several months before an existing deal ends. It may also be possible to move to a different option before completion if a more suitable rate becomes available.
That does not mean everyone should immediately fix again. A fixed rate provides certainty, but trackers and other variable options may sometimes be appropriate depending on your plans, circumstances and attitude towards future payment changes.
The important thing is having enough time to compare the options properly.
If you're on a tracker mortgage
Tracker mortgages are much more directly linked to the base rate.
Following the 0.25 percentage-point increase, someone on a tracker linked directly to the base rate should normally see their mortgage rate rise by the same amount, subject to the terms of their particular deal.
As a broad illustration, the increase is equivalent to approximately £15 a month for each £100,000 of mortgage debt, although the actual change will depend on your interest rate, mortgage balance, remaining term and lender.
If you deliberately selected a tracker, you may already have accepted that payments could rise and fall.
Even so, it is worth checking:
- What your new payment will be.
- Whether the tracker still suits your circumstances.
- Whether there are early repayment charges.
- What fixed-rate alternatives are currently available.
If you're on your lender's Standard Variable Rate
This is the group that may have the strongest reason to review its position.
Standard variable rates (SVR) are set by individual lenders and do not have to move by exactly the same amount as the base rate. However, lenders may choose to increase them following today's decision.
Some borrowers remain on an SVR deliberately, perhaps because they need flexibility, plan to sell soon or do not want an early repayment charge.
Others have simply reached the end of a fixed deal and rolled onto it without reviewing their options.
If that is you, it is worth checking whether you are paying for flexibility you neither need nor intended to have.
Should you fix now?
There is no universal answer.
A fixed-rate mortgage can provide certainty over monthly payments, which may be valuable if your household budget would struggle with further increases.
However, fixing also means committing to a particular rate for a period of time. Early repayment charges may apply if you move home, repay the mortgage or change the arrangement during that period.
Before deciding, it is worth considering:
- How long you expect to remain in the property.
- Whether your income or circumstances may change.
- How comfortable you would be with further payment increases.
- Whether you need flexibility to repay or move.
- The fees and early repayment charges attached to each option.
- The total cost, rather than focusing only on the headline interest rate.
Trying to predict exactly what interest rates will do next is not a particularly reliable mortgage strategy.
Even professional forecasts differ. Markets may expect further increases, but future decisions will depend on inflation, wages, energy prices and wider economic conditions.
The more useful approach is to find a mortgage that is appropriate for your circumstances and affordable under a reasonable range of outcomes.
What about first-time buyers and home movers?
This week's announcement does not mean first-time buyers or home movers should automatically put their plans on hold.
Affordability depends on much more than the base rate, including:
- Income.
- Deposit size.
- Existing financial commitments.
- Credit history.
- The property being purchased.
- Each lender's affordability assessment.
Fixed mortgage rates had already moved ahead of the announcement, so today's increase should not be viewed as a sudden 0.25% addition to every deal currently available.
If you are planning to buy, the practical starting point is understanding:
- How much you could potentially borrow.
- What the repayments may look like.
- How much deposit and moving costs you will need.
- What price range is genuinely comfortable.
That is much more useful than trying to guess whether the next rate announcement will be up, down or sideways.
And for savers?
A higher base rate can be welcome news for savers, but banks and building societies are not required to pass the full increase on. Some competitive easy-access savings accounts were already paying more than 4% before today's announcement.
The relevant question is not simply whether the base rate has risen. It is whether the account holding your savings remains competitive and whether the money is held in tax-efficient arrangements that remain appropriate for your circumstances and wider plans.
Stephanie's view
Today's rate rise will make a direct difference to borrowers on tracker mortgages and potentially those on other variable rates.
For most people on fixed deals, however, it is not an immediate crisis and it does not automatically mean new fixed rates will rise by 0.25%.
The important questions are much more personal:
- When does your current deal end?
- What rate are you paying now?
- What would happen to your monthly payment under the available options?
- Do you value certainty or flexibility?
- Are you at risk of slipping onto an expensive standard variable rate without realising?
- Mortgage headlines tend to focus on what the Bank of England has just done.
A useful mortgage review focuses on what you should do next.
Is your current mortgage deal ending?
If your fixed rate is ending within the next six months, you are on a tracker or variable rate, or you simply do not know whether your current mortgage remains suitable, our mortgage advisers can help you understand the options available.
At Poole Townsend, we can help you understand the options available and consider how different mortgage arrangements may fit with your circumstances and objectives.
If you are also planning to move, our Mortgage, Estate Agency and Conveyancing teams can support you through the wider process, from understanding affordability to completing your purchase. Get in touch to discuss more with the team.
This article is for general information only and does not constitute mortgage, financial or tax advice. Mortgage availability, rates and borrowing limits depend on individual circumstances and lender criteria. Not all mortgages are suitable for all borrowers. Interest rates and mortgage products can change, and the most suitable option will depend on your circumstances and objectives. Early repayment charges may apply when changing or repaying a mortgage. Your home may be repossessed if you do not keep up repayments on your mortgage.