Hundreds of thousands of homeowners face an almost immediate increase in their mortgage payments after the Bank of England raised interest rates for the first time in more than three years.
The Bank increased its base rate from 3.75% to 4% on Thursday, adding to pressure on households already facing higher living costs.
Around 510,000 outstanding homeowner mortgages are on tracker deals, which typically follow the Bank's base rate. These borrowers will see their monthly payments rise by an average of £30.72, according to UK Finance.
The increase could also affect homeowners on standard variable rate (SVR) mortgages, although it will be up to individual lenders whether they pass on the rise.
UK Finance estimates that around 470,000 homeowner mortgages are on SVRs. If lenders pass on the full 0.25 percentage point increase, the average borrower could pay an extra £14.28 a month.
The move will not immediately affect the 87% of outstanding homeowner mortgages on fixed rates. However, millions of borrowers are approaching the end of their current deals and could face more expensive repayments when they remortgage.
Millions of fixed-rate mortgages due to expire
Around 700,000 fixed-rate mortgages are due to expire in the second half of this year, with a further 2.3 million deals ending in 2027, according to UK Finance.
Andrew Montlake, chief executive of mortgage broker Coreco, said the latest decision would put further pressure on household budgets.
“For households, this is another turn of the financial screw.
“Tracker borrowers will see payments rise almost immediately, while those coming off fixed deals face a mortgage market already repriced for higher rates.
“The key message is not to panic. If your mortgage deal is ending, start early, understand your options and give yourself room to manoeuvre.”
UK Finance is urging anyone who thinks they may struggle with higher repayments to contact their lender. Mortgage providers have teams available to discuss support and possible options.
Bank of England warns inflation could hit 5%
The rate rise came as the Bank sharply increased its inflation forecasts, warning that the rate of price rises could reach around 5% in the second quarter of 2027.
Policymakers said higher energy and fuel prices linked to the ongoing conflict involving the US, Israel and Iran were pushing up costs for households and businesses.
Bank Governor Andrew Bailey said further increases could follow if the conflict in the Middle East is not resolved, although he stressed Thursday's decision should not automatically be seen as the start of a long series of hikes.
“There is now enough inflationary pressure in the pipeline caused by the rise in energy prices that an increase in Bank rate is warranted.
“Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes.
“But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase.”
All nine members of the Bank's Monetary Policy Committee voted for an increase, although one member, Catherine Mann, wanted a larger rise of 0.5 percentage points.
The Bank expects inflation to peak at around 5% in the second quarter of 2027 before gradually falling towards its 2% target in the third quarter of 2028.
It warned that businesses which have so far absorbed higher energy costs or protected themselves against price spikes through hedging may eventually have to pass those costs on to customers.
That could mean more expensive food, drink and other goods and services for households.
Food inflation is forecast to rise as high as 4.8% next year, partly because of higher energy costs for manufacturers and potential supply chain pressures linked to the El Niño weather system.
Household energy bills are also expected to put pressure on inflation, with Ofgem's price cap forecast to rise by almost 25% in January to an average annual bill of £2,150.
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Chancellor points to Budget support for households
Chancellor John Healey said the Iran conflict was affecting families and businesses in the UK.
“The Iran conflict is reaching deep into the pockets of families and businesses here at home.
“In my Budget I acted to give some breathing space to families and businesses. Twenty million households will get a £100 energy payment, I extended the tax cut on electricity bills and froze fuel duty.
“I also set out the course ahead to get costs down for good. That includes big changes to our energy system so Britain is better protected from global shocks in the future.”
The Bank said Budget measures, including removing VAT from household electricity bills, were expected to reduce the inflation rate by around 0.25 percentage points in the second quarter of next year.
Interest rates are generally increased to try to bring inflation down. Higher borrowing costs can discourage spending and encourage businesses to limit price rises.
However, the Bank warned that the impact of the energy shock could continue to feed through the economy even if the conflict eases.
What the rate rise means for house prices
The increase could also affect people hoping to buy or sell a property.
Richard Donnell, executive director at Zoopla, said higher mortgage rates had already been weighing on activity in the housing market.
“Higher mortgage rates have been a drag on housing market activity since the spring, with sales agreed down 8% on last year and this latest increase in the base rate set to make more buyers pause and wait on their home buying decisions.
“While there are fewer sales than this time last year, sales that are being agreed are happening just as quickly as a year ago as serious buyers become more selective.
“There is demand to buy homes, but sellers need to price their homes carefully to ensure they attract the active buyers.”
Jason Tebb, president of OnTheMarket, said: “Serious buyers and sellers continue to engage with each other but with the former having potentially less purchasing power after today’s announcement, the sensible pricing of property coming to market is essential.”
Nicky Stevenson, managing director of Fine & Country, said prospective buyers should take extra care with their budgets.
She said: “understanding affordability, securing mortgage advice early and allowing some flexibility in monthly budgets will be particularly important in the current environment”.
Emily Williams, director of research at Savills, said: “House price growth is forecast to accelerate to 5.0% in both 2029 and 2030.”
Could interest rates rise again?
Economists warned that another increase could be on the cards in the coming months, depending on how energy prices develop.
Frances Haque, chief economist at Santander UK, said: “The key question is whether today’s decision is a precautionary move or the start of further increases.
“With energy prices facing further increases, inflation expectations rising and wage growth stagnating at levels above those consistent with the 2% target, it certainly looks as if further hikes will feature in 2027.
“However, the question about how the economy reacts to all of this will be critical; the resilience it has shown so far has been remarkable, but the tension is mounting.
“For the time being, homeowners should prepare for borrowing costs to remain elevated.”
Thomas Pugh, chief economist at RSM UK, said: “The longer the shock lasts, the greater the risk that it becomes embedded in domestic wage and price setting. That points to more hikes to come.
“Unless energy prices fall dramatically and stay down over the winter, another rate hike in February looks a sound bet.”
Matt Swannell, chief economic adviser to the Item Club, said the timing of the next increase was less certain.
“The timing of the next hike is now less clear and looks very likely to be determined by how wholesale energy prices move over the coming weeks.
“For now, a December hike looks like a coin toss.
“But we think it’s likely that the bank rate will be at 4.25% by February – there’s a good chance that by that point, as the economy will have entered the 2027 pay settlement season, that the Committee will take another look at the need for more hikes, as by then it will have started to see if second-round effects are beginning to emerge.”
Simon Gammon, managing partner at Knight Frank Finance, said: “The Bank of England may be raising rates, but global events will exert the most influence on UK mortgage rates over the coming months.”Savers could benefit from higher interest rates
While mortgage borrowers face higher costs, the latest rate rise could be good news for some savers.
Banks and building societies may increase the rates they offer on savings accounts, although they are not obliged to pass on the full increase.
Jenny Holt, customer savings and investment director at Standard Life, said: “For savers, higher interest rates could bring better returns on cash, although banks won’t necessarily pass on the full increase.
“With inflation still elevated, it’s important to consider whether savings are maintaining their purchasing power.
“It’s worth checking the rate you’re receiving and whether a more competitive account is available.”
Susannah Streeter, chief investment strategist at Wealth Club, said savers should shop around for better deals.
“For savers, a rate hike could see even more attractive deals land in the market, and it’s really worth shopping around.
“Some easy access accounts are already paying in the region of 5%, although the very best rates often come with restrictions, with even better offers available if you can stow away your money for a year or more.
“However, rates may not move significantly higher given that the market has already priced in the likelihood of further hikes.”
Rachel Springall, a finance expert at Moneyfactscompare.co.uk, said: “Savers must make time to review their old accounts.”
Sarah Pennells, a consumer finance specialist at Royal London, added: “Higher rates can be good news for savers, but it’s important to check whether your savings rate has increased and by how much.
“Shopping around and checking the rate you’re receiving can make a real difference.
“For anyone worried about their finances, now is a good time to take stock of regular outgoings and prioritise building a financial buffer where possible.
“If you’re worried about your mortgage payments or are struggling, speak to your lender as soon as you can rather than waiting until you miss a payment.
“The earlier you ask for help, the more options may be available.”
Pensioners could see annuity rates improve
Retirees and people approaching retirement could also benefit from the latest increase.
Sarah Coles, head of personal finance at AJ Bell, said people shopping around for an annuity could potentially secure a higher income for life.
“Anyone currently shopping around for an annuity could see rates rise on the back of a bank rate hike, which would improve the income for life they can take from their pension.
“Some people consider buying an annuity with some of their pension pot, alongside using income drawdown with the rest of it, so they can combine guaranteed income with flexibility and potential growth.
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“For these people, now could be a good time to shop around for a generous annuity rate.”
Jinesh Vohra, chief executive of mortgage app Sprive, said borrowers could also consider making overpayments where their mortgage terms allow.
“Overpaying, even by relatively small amounts, can reduce the outstanding mortgage balance and the interest paid over the life of the loan.”
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