Interest rates are at their highest level since 2008 - what does it mean for you?

Personal finance analyst and podcast host Sarah Coles explains what an interest rate rise is, and what it means for you

The Bank of England (BoE) has announced an interest rate rise of 2.25% in an attempt to deal with spiraling inflation.

The rise of 0.5% is the highest spike since 2008, while the bank also says that it expects the country to lose 0.1% of its GDP over the current quarter - which could indicate the country has entered a recession.

Sarah Coles, a senior personal finance Analyst at Hargreaves Lansdown and podcast host for Switch Your Money On, said that the decision is about tackling inflation.

"The Bank of England has a target for inflation, and that's 2%." she said. "At the moment, obviously, it's much higher - it's at almost 10%."

What is an interest rate rise?

'Interest' refers to the money borrowers pay to money lenders, as a price for borrowing.

The interest rate, therefore, is the charge you have to pay to borrow money. Most obviously, this will affect people paying off mortgages on homes.

An interest rate rise means they will owe banks more money than they did previously.

The BoE raising the interest rate influences other interest rates in the economy.

Why has the BoE raised interest rates?

The Governor of the Bank of England, Andrew Bailey, speaking at a conference. Credit: PA

The UK is currently gripped by rising inflation, which means prices are rising and the value of the money in your pocket is falling.

By making the cost of borrowing more expensive, the BoE hopes to force down the rate of inflation.

As Sarah Coles explains: "The Bank of England has to take action to try and bring it [inflation] down.

"What it does is it raises the interest rate and that makes it more expensive for people to borrow and the idea is that they stop borrowing, stop spending so much, and that reduction in demand actually ends up pulling prices back down again."

What could a rise in the interest rate mean for my mortgage?

A mortgage is another word for the large loan many people take out from a bank, in order to buy a house, which they then pay back in instalments over many years.

Those instalments include interest - but as Sarah explains, the rate rise doesn't necessarily mean that everyone will now have to may more.

Some people in the UK will see their mortgage repayments increase, says Sarah Coles

"Most people in the UK with mortgages are protected by a fixed rate mortgage," she said.

"About three quarters of people are on a fixed rate so actually nothing will change for them."

But for those whose mortgage deal directly tracks the base rate their payments will increase by around £49 per month on average - as a result this will add up to nearly £600 annually.

Meanwhile, a borrower sitting on their lender’s standard variable rate (SVR) will typically see a monthly increase of just under £31 - adding up to around £370 per year - according to figures from the trade association, UK Finance.

Households on a average tracker mortgage will now have to pay an extra £49 per month. Credit: ITV News

The size of the UK economy shrank last quarter - and is projected to shrink again this quarter.

If that happened, the UK would technically be in a recession, which could lead to a number of impacts - notably on jobs.

The UK last entered a major recession in 2009, following the previous year's financial crash.

Am I able to switch to a different mortgage deal?

Mortgage deals are typically agreed for a set period of time and exiting them before this phase has finished can be tricky.

For example, tracker mortgage rates can last for two, three, five or ten years.

If you're looking to switch deals you will usually need to make an advanced repayment charge or even agree to pay off your mortgage early.

For further advice reach out to the bank you have the mortgage with.

How could rising interest rates affect other types of loans?

Experts have said anyone with an existing fixed-rate personal loan or car loan does not need to panic yet as the terms of their loan have already been agreed.

However, people who are now looking to take out credit may find that the cost of paying it back has grown higher.

How will savers be affected by rising rates?

During the coming weeks savers might see some improvements to deals, but this could be offset by a 40-year high in the level of inflation.

Ms Haines said: "The real return on any cash sitting in a savings account will be deeply negative - no matter how great the headline rate is”.

“With the best easy access accounts climbing to 1.95% this week and the best fixed-term accounts hitting 3.82%, every penny in additional interest will be crucial in the fight against high inflation, which eats away at our spending power.

“But it might be worth waiting a little while to let the latest interest rate rises trickle through from lenders to savers.

“While banks and building societies are quick to apply higher rates to debt, they can be a little slower to deliver the good news to savers.”

Is the UK in recession - and what would that mean for our economy?

"Companies will tighten their belts," said Sarah. "They'll stop spending. They'll also sort of run into difficulties with people who aren't buying. So, they will sometimes be forced to make people redundant or to cut back their workforces.

"It produces this really awful situation where people don't have any security over their jobs, it means they're not willing to spend their money, they're not willing to borrow for big things like buying a house or things that they need like a car.

"It just means that the whole economy - the slow economy - slows down even more because people aren't shopping."