The Bank of England increased interest rates for the first time in over three years on Thursday as it attempts to tackle rising inflation linked to the Iran war. Experts warn that further hikes could follow over the next 18 months as the conflict continues to drive up food, fuel and energy prices across the UK and globally.
The rate rise immediately affects the roughly 1.3 million Britons on variable rate mortgages, where repayments track the Bank of England base rate. Peter Gill, a 48-year-old tiling business owner in Halifax, will see his monthly repayments increase by about £45 following Thursday's quarter-percentage point rise. Despite the increase, he considers it cheaper to remain on his variable deal rather than switch to a fixed-rate mortgage. Gill, who has a combined household income of £45,000 with his wife Faye, is already working about six and a half days a week to cope with rising costs across the board, including higher wages for staff and increased raw material expenses.
Most UK mortgage holders are on fixed-rate deals, but they face their own challenges when rates climb. David Hollingworth from brokers L&C Mortgages said many people would be shocked at how much higher fixed-rate deals are now compared to five years ago, after recent market-driven increases. Dawn Fazackerley-King, a Pilates instructor near Ipswich with a joint household income of about £70,000, will face a £200 monthly increase when her five-year fixed deal at 1.4% expires and she refixes for two years at 5.69%. She and her husband, who both work full time, have already scrutinised their direct debits and say there is no further room to cut spending.
Credit card and personal loan borrowers face pressure too. When the Bank of England raises its base rate, credit card borrowing costs typically increase, although not always immediately. Providers can raise interest rates with 30 days' notice. Ben Thomas, 41, from Shropshire, is £52,000 in debt after leaving his accountancy career during the Covid pandemic for a mental health crisis and retraining as a paramedic. Though he has paused interest on most debts, he still faces charges on around £2,000 of credit card debt and worries about higher repayments. StepChange, a debt charity helping Thomas, reported a 20% increase in people seeking support this year and warned of mounting pressure ahead.
For borrowers and savers alike, higher interest rates mean mortgages and other loans become more expensive at a time when households are already stretched by rising food and energy bills, though savings rates will improve.