What the interest rate rise means for your finances
Words by ITV News Digital Journalist Jocelyn Evans
The Bank of England has raised interest rates from 1% to 1.25% – the highest since January 2009. But what does that actually mean and how will it impact your finances?
Why have interest rates been raised?
The idea is that putting interest rates up will help bring inflation (the rate of increase in prices for goods and services) back down.
In May inflation hit a 40-year high of 9%, with the cost of everyday goods and products soaring for struggling households. The Bank has a target of 2% inflation and uses interest rates to try and keep the rate of inflation low.
The last time the Bank upped interest rates, in May, it said: "It will take time to work."
But it will take time, it stressed, with it likely "inflation will keep rising this year and start to come down next year. We expect it to be close to our 2% in around two years."
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As interest rates rise, borrowing could become more expensive for you - whether it's a mortgage, buying a car on credit, or various other expenditures. Here's how the different areas of your finances will be affected:
A rise in interest rates is passed on from high street lenders to consumer and commercial borrowers and savers.
For the nine million people in the UK with a mortgage, they will feel the impact first - particularly those on standard variable rates (about 75% of all mortgages). Money saving expert Martin Lewis says these mortgages will typically be £12 per month per £100,000 more.
Those on tracker mortgages (a type of variable rate around two million people in the country are on) will see their monthly repayments increase by £25, according to UK Finance. Since December, this group have already seen a £118 rise per month.
For the majority on fixed-rate mortgages, these won't change until the end of the term - at that point rates are likely to then go up. According to UK Finance, 1.3 million fixed mortgages are ending at some point this year – meaning many homeowners will be looking for a new deal.
Moneyhelper.org has a mortgage calculator to help work out how your monthly payments may change.
Renters are also likely to come under pressure, as buy-to-let landlords pass on higher borrowing costs to their tenants. Simon Leadbetter, Global CEO of Fine & Country also said "struggling first-time buyers, who already face the greatest hurdles in the housing market, may find themselves trapped in expensive rentals for even longer."
A rise in interest rates should, in theory, be a win for those putting money away as their savings will earn more interest annually. But many people are struggling to set anything aside at the moment due to soaring inflation.
Sarah Pennells, consumer finance specialist at insurance company Royal London, says this interest rate rise isn't necessarily a plus for savers.
"Interest rates have climbed above 1% for the first time in more than 13 years. While rising interest rates are generally a win for savers, our research shows that almost a third of people were planning to reduce the amount they were saving, while a fifth would stop altogether, as a result of the cost-of-living crisis.
"For those who can save, the gap between interest rates and inflation, now at 9%, means savers are continuing to lose value on cash they have in the bank."
The Bank has been given a little more wriggle room by the chancellor, who is set to funnel billions to struggling households to help them deal with soaring energy bills.
But the interest rate raise will eat away at some of this handout, because the cost of borrowing will go up for homeowners.
What steps you can take to help with an interest rates rise
Insurance company Royal London suggests the following six steps to cope with the rise:
Check how much interest your savings are earning. Some easy access accounts pay 0.1% interest, or even less so you could be in for a nasty surprise.
Check comparison sites and best buy tables for savings products but wait a couple of weeks before you choose, so banks and building societies can announce any savings rate rises.
Use comparison or mortgage broker websites to see how your variable mortgage rate compares to the best buys.
Not all mortgage lenders take the same approach when assessing whether they want to lend to a particular borrower. A mortgage broker can advise you on the best option for you.
Be aware that while the interest rate on personal loans is fixed, rates on credit cards can rise for both new and existing customers.
If you’re struggling, talk to your lender or a debt advice charity such as StepChange or National Debtline.