MILLIONS of households are facing a huge increase in bills as interest rates rise again today.
The Bank of England (BoE) is expected to raise its base rate by 50 basis points today.
Economists expect the Bank’s benchmark interest rate to rise from 3% to 3.5% in December, the highest in more than 14 years.
It will also be the ninth time in a row that the Bank of England has raised interest rates.
Last month, the bank opted for a 0.75 percentage point hike, the highest one-time gain since 1989.
The move will make the cost of borrowing, including loans, credit cards and mortgage payments, more expensive.
Major banks use the base rate of the Bank of England to calculate the interest rates it offers to customers.
This means there could be more suffering for households already struggling with a cost-of-living crisis.
This is good news for savers, though, as they can get better rates on their savings.
Raising interest rates is meant to encourage people to save rather than spend, which in theory should help bring runaway inflation under control.
This comes after UK inflation fell to 10.7% yesterday from 11.1% in October.
Inflation is a measure of how the prices of goods and services have changed over the past year.
Thus, prices are still rising, but at a slower rate than last month, when they rose at the fastest rate in 41 years.
Here are the main ways today’s announcement could impact your finances.
Mortgage rates are rising
Millions of households could face £3,000 a year increase in bills if interest rates rise as expected.
People with fixed-rate mortgage deals expiring at the end of 2023 face a £250-a-month bill increase when they are forced to refinance at the higher rate.
Martin Lewis said on ITV’s Good Morning Britain yesterday: “Anyone currently refusing cheap treatment is likely to be paying around 3% more than they were previously paying.
“This percentage increase equates to an increase of £160 per month for every £100,000 of mortgage loan.”
But the exact amount by which your mortgage payment will increase will depend on the size of the mortgage, the rate you set, and the loan-to-value ratio when you remortgage.
If you have a fixed rate mortgage, the increase will not immediately affect your payments.
But other mortgages, such as a tracked mortgage or a standard variable rate mortgage (SVR), can be affected right away.
Tracker mortgages are pegged to the base rate of the Bank of England, meaning you will see an immediate impact on your mortgage payments if rates rise.
Homeowners on floating-rate mortgages won’t see their payments go up right away, but they will likely increase soon after interest rates rise.
Your bank must inform you of the change in your SVR before it goes up.
SVR tends to be higher than fixed rate deals, so if you’re on one, you’re probably already paying more than you need to.
Switching to a fixed rate mortgage can help you avoid future increases by locking in a lower rate.
Today’s new forecast of how much interest rates will rise next year may bring some relief to mortgage bills.
At its last interest rate meeting in November, the Bank warned that interest rates would peak at 4.6% next year.
If this forecast is revised down, it could give some lenders the opportunity to cut mortgage rates.
Last month, several lenders began cutting rates on their standard variable and fixed mortgages in response to a revised outlook announced by the Bank.
Credit card and loan rates could rise
The cost of borrowing through loans, credit cards and overdrafts could also rise as banks are likely to pass on a higher rate.
Many major banks such as Lloyds Bank, MBNA, Halifax and Barclaycard link credit card rates directly to the Bank of England base rate.
This means that their credit card rates will automatically increase in line with any interest rate changes, but you will be notified before this happens.
You can check your credit card terms and conditions to see if the rate can go up when the base rate goes up.
Some loans you already have, such as a personal loan or car financing, usually stay the same because you’ve already negotiated the rate.
But rates on any future loan could be higher, and lenders could increase rates on credit cards and overdrafts — though they should warn you ahead of time.
You can cancel the credit card if you wish and you will have 60 days to pay off the outstanding balance.
Economists can get better rates
Savers may get some relief as banks continue to struggle to offer the best interest rates on the market.
Raising rates is usually good news for savers, especially after a long period of very low rates on their money.
Along with low rates, high inflation can devalue any of your savings.
So if you have £100 in the bank this year and inflation is 10%, the real purchasing power of that money will drop to £90 next year.
Another rate hike could cause banks to pass on higher rates to depositors, although they are usually much slower than when borrowing rates are raised.
This means that savings rates are likely to rise slowly rather than all at once.
Anyone currently receiving a low rate on easy access savings may find it worth looking for a better rate after any rate increase and transferring their money.
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