Borrowers hit the hardest as interest rate climbs to highest level in 13 years

The Bank of England announced today the interest rate is rising to 1.25%.

Sarah Pennells, consumer finance specialist at Royal London, comments on the rate rise:

“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.

“Mortgage borrowers on a variable or tracker rate will be hit the hardest as their monthly costs will rise, and this could be a significant increase. Every quarter per cent rise in mortgage rates costs someone with a £200,000 25-year repayment mortgage an extra £27 a month. While some homeowners will be able to afford that, others will undoubtedly struggle, especially as other costs spiral.

“Following a rise in base rates, banks and building societies don’t necessarily raise interest rates on all their savings products and may not increase them by the same amount, so it’s worth waiting a few weeks before checking comparison websites and best-buy tables to see if you can get a better interest rate. Even though re-mortgage deals are not as competitive as they were a few months ago, there are still discount or tracker rates on offer at less than 2% and fixed rate deals charging less than 3%. A mortgage broker would be able to recommend the best mortgage for you as it’s not necessarily going to be the one with the cheapest headline rate of interest.”

Six steps to cope with an interest rate rise:

1. 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.
2. 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.
3. Use comparison or mortgage broker websites to see how your variable mortgage rate compares to the best buys.
4. 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.
5. Be aware that while the interest rate on personal loans is fixed, rates on credit cards can rise for both new and existing customers.
6. If you’re struggling, talk to your lender or a debt advice charity such as StepChange or National Debtline.