Bank of England Raises Base Rate To 3.5%

The Bank of England increased the base rate today (15th December) for the ninth consecutive time, taking it up from 3% to 3.5%. The rise is slightly smaller than the 0.75% increase in November, but it will still come as a blow to many existing homeowners and those hoping to get a foot on the property ladder.

The Bank of England is charged with using interest rates to keep inflation below a target rate of 2%. Although inflation has eased very slightly over the last couple of months, the current rate is still tipping over the 10% mark, and a further rate hike was very much expected. Interest rates are predicted to continue increasing in 2023, with forecasts ranging from highs of 4.5% up to 6%, as the UK economy continues to battle with raging fuel prices and a cost-of-living crisis.

What do base rate increases mean for mortgage holders?

There’s good news and bad news for anyone with an existing mortgage, depending on the type of mortgage you hold. Those on fixed-rate tariffs will be unaffected by the rise but shouldn’t feel too smug. Although it’s good to have security and low monthly repayments during times of higher rates, there could be a nasty shock in store for anyone needing to refix in the next year.

Most experts would advise fixed-rate mortgage holders to plan ahead, consider overpayments while they can, or at least stay aware of how future repayments could change, and make preparations for this.

However, anyone with a variable rate mortgage will see their monthly payments increase – a further burden on many families who are already finding their finances stretched. A 0.5% rise on a variable or tracker mortgage equates to approximately a £25 per month increase in monthly repayments for every £100,000 you have on your mortgage, based on a typical 25-year term. If you have £300,000 outstanding, for example, you will be paying roughly £75 extra per month.

You can use our mortgage repayment calculator below for more accurate estimates of how interest rates will impact your monthly mortgage payments.

Are first-time buyers impacted by the interest rate change?

Yes, first-time buyers trying to secure a mortgage now will find themselves with much higher costs than last year, when rates were barely above zero. House prices are already prohibitively expensive for many people, and an increased cost of borrowing on top of this will price many people out of the market.

Some potentially comforting news for first-time buyers is that the housing market is weakening, with prices falling during autumn 2022. This, alongside the raising of the stamp duty threshold from £125,000 to £250,000 in September’s mini-budget, may at least partially offset the increase in the cost of borrowing.

The Bank of England’s Monetary Policy Committee will meet again on 2nd February 2023 to decide whether the base rate should rise, fall or remain unchanged.