Bank of England raises interest rate to 3.5%

The Bank of England’s Monetary Policy Committee (MPC) has voted to increase the base rate by 50 basis points. On top of November’s 33-year-high rate hike, it means the base rate now stands at 3.5%, the highest it’s been since the financial crisis of 2008.

The Bank has already increased rates at every meeting this year, making this the ninth consecutive rise, and the latest decision to hike borrowing costs comes amid fears the UK is falling into recession.

The MPC voted by a majority of six to three in favour of the latest increase, with two members favouring no change to the previous rate of 3.0% - and one member voting to increase the rate to 3.75%.

The MPC also indicated “further increases” may follow as it seeks to tackle inflationary pressure.

This latest base rate rise will be disappointing news for homeowners who are already facing a cost of living crisis as inflation remains stubbornly high. While fixed mortgage rates have started to drop in recent weeks, the cost to secure a new fixed deal is much higher than at the beginning of 2022, with both the average two and five year fixed rates increasing by over 3% during the past year. 

The erratic behaviour in mortgage pricing means it’s essential to seek independent advice from a broker and scrutinise all the options available to you.

Whether now is the time to grab a new deal depends entirely on your circumstances. As fixed rates are expected to come down further, you may want to wait and see what the next few weeks will bring. However, if you’re sitting on a standard variable rate (SVR), the base rate rises will have an impact on your repayments. Since December 2021, the average SVR has risen by 2% and lenders are traditionally quick to pass on base rate rises.

A rise of 0.50% on the current average SVR of 6.40% would add approximately £1,509 onto total repayments over two years. This calculation is based on a £200,000 mortgage over a 25-year term on a repayment basis. For a more individual assessment use our online mortgage calculator.

With further base rate rises expected in 2023 and house prices predicted to fall, demand for mortgages may be impacted. If you’re looking to refinance next year, now may be the time to start building a savings pot to pay for any associated costs.

There’s no guarantee that banks will pass base rate increases on to savers. Indeed, the majority of the biggest high street banks have failed to pass the full BoE base rate rises to easy access accounts, with one brand passing on just 0.39% since December 2021. If your loyalty to a bank or building society isn’t being rewarded, it’s vital to shop around and find a better rate for your savings.

If you don’t want to lock your money away for too long a notice account may be worth considering, with rates improving greatly in this area of the market in 2022. And if you’ve yet to use your ISA allowance, rates are much higher now than at the start of the year, although you should consider any Personal Savings Allowance when comparing ISA and non-ISA accounts.

Moving into 2023, variable savings rates are expected to continue to rise across the board, so it will be down to you to keep abreast of rate changes and switch if you’re getting a poor return on your hard-earned cash.