The Bank of England has increased the interest rate to 0.75% to tackle inflation, but what does this mean for you? This simple guide will explain why it had to be done and how you can stay one step ahead.

What is inflation?

Inflation is an economic term that describes money becoming worth less over time. It measures how many things or services you can get for your money now, compared with that same amount last year.

Why is everyone talking about it?

Inflation (or the cost of stuff) is high now for a couple of connected reasons:

  • There’s lots of demand this year for raw materials and manufactured goods as industries are bouncing back following covid
  • There was little demand last year because of covid lockdowns

This means that a year on year comparison shows pretty high inflation - costs in September 2021 were 3.2% higher than in 2020.

What does the Bank of England have to do with it?

Inflation erodes the value of cash so even though some inflation is normal, an economy can be damaged if it gets out of hand. To keep inflation low and stable, the government sets the Bank of England an inflation target of 2%. They can’t control everything but they use interest rates to help.

Here’s what the Bank of England have decided to do

The Bank of England has voted to raise the interest rate - known as the Base Rate - from 0.1% to 0.25% to counter the surge in inflation. This means that while in theory, it makes saving more profitable, it makes lending (like mortgages or credit cards) more expensive.

What does this mean for your mortgage right now?

A quarter of people in the UK with a mortgage are on a variable, tracker or standard variable rate. These mortgage holders will see an increase in their monthly payments going forwards.

This might mean repayments going up by potentially hundreds of pounds a year. For example, if you were on a 3.5% standard variable rate, your monthly repayments on a 25 year £200,000 mortgage would be an extra £180 per year with this 0.15% rise. 

For anyone on a fixed-rate mortgage, monthly repayments will stay the same until the deal ends.

What about the future?

The key takeaway from the Bank of England’s decision is that this could be the first hike of several. They hinted at this in a statement where they said:

“Tightening of monetary policy over the forecast period is likely to be necessary.”

In other words, to keep inflation down, interest rates may have to continue to rise. Earlier this year, the Office of Budget Responsibility (OBR) predicted that rates could reach 3.5% by 2023 which means that this first increase might be the end of the record-low interest rate era. 

Homeowners don’t need to panic, nothing major will change overnight. But it might be a good time to consider remortgaging to lock in a lower rate for longer - 5, 10 or even 30 years. 

For people thinking about getting on the property ladder, don’t be put off - the interest rate rise is good news for saving a deposit! Also, there’s innovation going on in the mortgage world to create products that would weather an interest hike storm, like Habito One

Let’s talk

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