The Bank of England’s Monetary Policy Committee voted by a majority of six to three to increase the Base Rate from 3% to 3.5%.

This means the Base Rate has now been increased from 0.1% to 3.5% over the last year, reaching its highest level in 14 years.

The Bank also hinted that further Base Rate rises could be needed. It said that, ‘should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target’.

Impact on borrowers

Variable rate borrowers will likely see their pay rate rise in the next few weeks.

This includes tracker rate borrowers, who will see the full increase passed on, as well as discounted variable rate and standard variable rate borrowers (who will see an increase at the discretion of their lender).

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Since December 2021, the average SVR has risen by 2% and, as lenders are traditionally quick to pass on base rate rises, it will impact on someone’s monthly repayments. A rise of 0.50% on the current average SVR of 6.40% would add approximately £1,509 onto total repayments over two years.”

Those currently on a fixed rate mortgage will see no change for the duration of their current deal.

But the problems arise when their current deal expires and they need to remortgage.

That’s because new mortgage rates are much higher than they were when borrowers last took out a deal, so they are likely to face sharp payment shock as their monthly payments increase.

The average two-year fixed rate last December was just 2.34%, compared to 6.01% today, said Moneyfacts, although this is slightly down on the 6.47% recorded in November.

Springall added: “This latest Base Rate rise will be disappointing news to borrowers who are already facing a cost of living crisis and recent turmoil surrounding mortgage interest rates. Consumers may breathe a sigh of relief to see fixed mortgage rates have started to drop in recent weeks and hope these rates will fall further. However, the cost to secure a new fixed deal is much higher than they may realise, as both the average two- and five-year fixed rates have increased by over 3% during the past year. The erratic behaviour in mortgage pricing makes it essential for borrowers to seek advice to scrutinise all the options available to them.”

Gareth Davies, director at broker, South Coast Mortgage Services, said: “For borrowers, my overriding message is: ‘Don’t Panic’. Lenders have long since priced this rate rise, and also future base rate increases, into their current pricing models. Tracker products will naturally now creep up, but we haven’t seen any of the high street lenders re-pricing their fixed deals for the worse this week. This is usually common practice a day or two before a base rate announcement.”