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The Bank of England raised the UK’s base rate to 5% in June from 4.5%, the highest level since 2008

The 0.5% increase is the thirteenth rise in a row and was a larger jump than many economists had been expecting.

UK inflation failed to fall as expected in May, remaining at 8.7% – well above the bank’s 2% target – with core inflation actually rising. This remains the highest of any other country in the G7.

Almost two million mortgage holders on tracker rates have seen their monthly bills rise every six weeks since December 2021, due to rate rises. But rising rates impacts on many areas of our personal finances.

In this article, we cover:

How does raising interest rates help inflation?

How will mortgage repayments be affected by interest rate rises?

What does the interest rate rise means for savings?

What is the effect of a rate rise on loans, debt and credit cards?

How does raising interest rates help combat inflation?

Inflation – a measure of the cost of living – stayed at that same stubbornly high rate of 8.7% in the year to May, promoting economists to raise forecasts of how far the base rate will go this year.

It had previously been expected to peak at 5.75%. This has now risen to 6%.

The Bank of England has been raising rates in an attempt to bring inflation back down to its 2% target. It does this by making borrowing more expensive.

In theory, this puts people off spending and encourages them to save instead. With less demand for goods and services, prices should fall and inflation should start to go down.

The Bank has hiked rates 13 times since December 2021, when the cost of borrowing stood at 0.1%, to its current level of 5%.

How do interest rate rises affect mortgages?

If you’re on a tracker, standard variable rate (SVR) or variable mortgage, your payments will rise almost immediately in response to the latest base rate hike.

These products move in line with the Bank of England, so when it rises, your payments rise, and when it falls, your bills fall, too.

With 639,000 properties on tracker mortgages and 773,000 on standard variable rates, one in four mortgage customers have seen their mortgage payments rise every six weeks since December 2021.

After a base rate change, your lender will write to you and let you know how you will be affected. Your mortgage contract should explain how quickly these changes should take effect.

How much will my variable mortgage go up by?

An increase in the bank rate from 4.75% to 5% means that those on a typical tracker mortgage face paying about £47 more a month. Those on standard variable rate mortgages would face a £30 jump.

This comes on top of increases following the previous recent rate rises. Compared with pre-December 2021, average tracker mortgage customers face paying about £441 more a month, and variable rate mortgage holders about £282 more.

I’m on a fixed mortgage, what does the base rate rise mean for me?

If you have a fixed deal, you are shielded for now. However, when it ends, you will likely find yourself paying significantly more.

There are six million households on fixed rate mortgages in the UK. Around 800,000 of those deals will end this year, as the two-year anniversary of the stamp duty approaches – leading to serious increases in homeowners’ bills.

Two and five year deals are now averaging at 6.19% and 5.82% respectively, according to Moneyfacts. This compares to 1% to 2% a little over a year ago. See our article on what’s happening to mortgage rates for more.

So should I remortgage now?

If your mortgage is approaching expiry and you want to fix, you can do so up to six months in advance.

The providers that allow this include Natwest, Nationwide and Barclays. This starts from the date of offer issue (after underwriting).

There are a few exceptions. Halifax and Santander issue offers that are valid for as little as 14 days, but can go up to six months. These have standardised offer validity lengths based on dates of mortgage deal issue, rather than mortgage offer date.

Doing a product transfer with the same lender, rather than a full remortgage with a new lender, can save some time, and often doesn’t come with fees. But you can’t be sure you’re getting the best interest rate on the market – so shop around. See our guide on remortgaging.

If you locked in a deal in advance, you may be able to switch it if rates have fallen – see what to do if you want to cancel your fixed-rate mortgage deal.

If you’re exiting your deal early, make sure the savings outweigh any fees you may have to pay.

Some tips to consider for remortgaging:

Consult a broker: rates are chopping and changing at speed right now. Often, mortgage brokers will get a heads-up when a deal is about to be pulled, so it’s worth speaking to one.

Charges and fees: watch out for early repayment charges or exit penalties if you are considering switching before your current deal ends. Other costs include arrangement fees, valuation charges and the cost of a solicitor. It could still work out cheaper in the long run for you to pay the fees and charges, but make sure you crunch the numbers.

Use a mortgage calculator: remortgaging to a lower interest rate can save you a lot of money. Use this mortgage calculator and remember to factor in any fees and charges.

Benchmark the best deal for you: Shop around for the best deal on the market. We have a free mortgage comparison tool that can help you benchmark the best deals for you.