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AJ Bell comments on Bank of England interest rate rise

The Bank of England has raised interest rates from 0.1 per cent to 0.25 per cent, ending the longest period in recent history with no rate move.

The rise means a GBP264 million a year hike to the nation’s mortgage bills and GBP5,000 of savings will earn an extra GBP7.50 a year if the full increase is passed on, according to Laura Suter, head of personal finance at AJ Bell.

Suter says:  “Last month we were all geared up for a rate rise party, only for the punchbowl to be whisked away at the last moment. Fast forward a month and there was minimal expectation of an increase, only for the Bank of England to whip out a Christmas surprise for everyone with a hike.

“The committee also only had one dissenter for the rate increase, with an 8-1 vote to raise rates from 0.1 per cent to 0.25 per cent, which is a massive swing from last month when just two members of the committee voted to increase the rate. Market expectation of an increase in rates ticked slightly higher after yesterday’s soaring inflation figures were published, but the figures were still very much pointing to no action in 2021.

“Rising inflation is the real reason behind this fast switch, with new figures out yesterday clearly causing a lot of concern at Threadneedle Street. The Bank has now increased its expectations for inflation and thinks it will hit 6 per cent next April – which is unwelcome news for any household, which is no doubt already feeling the effects of rising prices and bills. While Omicron is still a worry for the Bank, rampant inflation is clearly an even bigger concern. 

“The move by the bank ends the longest period with no rate change, going back as far as the 70s, with the nation having being stuck at 0.1 per cent for just shy of a year and nine months. However, anyone with savings who has been through almost 13 years with rates below 1 per cent probably won’t be jumping for joy at the slight increase today.”

In terms of mortgages, Suter says: “Overnight, millions of homeowners are going to see a rise to their mortgage costs, at a time when we’re facing a cost of living squeeze and everyone’s finances are already feeling tighter. Mortgage payments are the biggest outgoing for most homeowners, meaning this is a very unwelcome present under the tree for everyone.

“Anyone on a tracker rate mortgage will see their interest rates go up overnight, while those on standard variable rates are likely to see their rates rise too, albeit over the coming weeks and months. 

“The average UK homeowner has GBP131,000 of mortgage debt, and so those on a tracker deal will see their mortgage costs rise by GBP120 a year. When you extend this over the 2.2m people who have a variable rate mortgage, it leaves UK households with a GBP264 million a year hike in their mortgage bills. Of that, around 850,000 homeowners are on tracker deals and so GBP102 million will be added to the nation’s mortgage bills almost overnight. Clearly those with more borrowing will be hit harder, as someone with a GBP400,000 mortgage will see a GBP360 hike to their annual bill as a result of the rise to 0.25 per cent today. 

“Mortgage companies have been quick to hike their rates even before the official increase in Base Rate and they’ll be even quicker to pull cheaper deals now. But with interest rates expected to rise again next year, there’s still merit in those on variable rate deals fixing their rate now. However, many mortgage prisoners don’t have this option and will be stuck on their lender’s most expensive rate, the standard variable, and will be forced to pay more after today’s hike.

“The 74 per cent of mortgage customers who are on a fixed rate deal will be protected from today’s increase, for now. But anyone whose rate is expiring soon will have to face higher rates when they come to remortgage. Many homeowners have only ever known rock-bottom mortgage rates and need to prepare themselves for rising costs. 

“Anyone who signed up to a two-year fixed rate deal earlier this year, nabbing a record low rate, will face a stark rise when they come to re-mortgage in the first half of 2023, based on OBR estimates of rising mortgage rates. Someone with GBP250,000 of borrowing who fixed earlier this year and renewed in 2023 would see GBP600 a year added to their mortgage costs, while someone with GBP450,000 of borrowing would see their costs hike by GBP1,068 a year, based on OBR estimates.

“While a small increase in the base rate now might not appear dramatic, for those who have a big mortgage or are at the limits of what they can afford it will feel very substantial. What’s unfortunate is that this rate rise comes when many families are already at breaking point, facing soaring heating costs, higher petrol costs and a more expensive weekly shop, as well as rising taxes next year.”

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