The Bank of England’s Monetary Policy Committee has voted by seven to two to increase its Bank Rate by 0.75 percentage points to 3%.

This is the biggest single rise in decades.

The Bank said it expects inflation to rise from its current level of 10.1% to 11% by the end of this year.

In line with that, it said further increases in Bank Rate may be needed to bring inflation down to target.

The Bank also predicted a prolonged recession until halfway through 2024.

What the rise means for borrowers

On a fixed rate: If you are on a fixed rate mortgage your rate won’t change until the end of your current deal.

At this point you will automatically move onto your lender’s standard variable rate (SVR) – which has already gone up significantly this year to an average 5.86%, according to Moneyfacts, and is likely to rise again after today’s increase.

Even if you do remortgage, rates on new deals are now significantly higher than they were last December, and likely higher than you’re currently paying. Today’s average two-year fixed rate was 6.47%, and the average five-year fixed rate is 6.32% (Moneyfacts).

Paul Holland, mortgage broker at Henchuch Lane Financial Services, said: “Anyone exiting their mortgage now and in the foreseeable will be having a shock in comparison to the rates they’re used to and we’re currently dealing with clients whose mortgages are going up by £500-£1,000 per month.

“This is making the energy crisis seem like a drop in the ocean and there will be a lot of people defaulting on their mortgages or selling their houses in the medium term.”

On a variable rate – including discounted variable rates, standard variable rates and trackers: If you are on a variable rate that goes up and down in line with wider interest rates, your pay rate is likely to go up within the next month, on top of previous increases you’ve already faced in 2022.

Adrian Anderson, director of property finance specialists, Anderson Harris, admitted: “This will be blow to around 1.5 million variable rate mortgage holders (around 20% of borrowers) who will see a significant increase in their mortgage payments.”

Your lender will contact you in the coming weeks with details of your new pay rate and monthly repayments.

What’s next?

Brian Murphy, head of lending at Mortgage Advice Bureau, said: “Expectations are that the industry will see an upwards trend of defaults on mortgage payments in the coming months, and so we urge anyone fearing that they may struggle with mortgage payments to go straight to their mortgage provider for guidance.

“For prospective homeowners, it’s a hostile environment to be buying in, but equally it seems doubtful that market conditions will become any friendlier in the near future – speaking to a whole of market adviser is, as always, the best course of action.”

Samuel Fuller, director of Financial Markets Online, added: “We’re not in Kansas any more. This is a huge wake-up call for borrowers and British businesses. It’s one thing to expect higher interest rates, quite another to have the cold reality of it hit home.

“Recession is expected, we might already be in one, and the latest hike will only exacerbate the trouble ahead for the UK housing market, a big determinant of consumer confidence.

“There’s been talk of mortgage rates moderating, even falling, but that’s wishful thinking.

“Remortgaging and home buying will immediately become harder than it has been for well over a decade thanks to stretched affordability and likely further increases in the cost of borrowing as lenders begin to price in yet more rate rises.”