The Bank of England monetary policy committee has taken the decision that many industry experts had been predicting for some time and increased the interest rate to 0.5 per cent from 0.25 per cent.
The move reverses the cut in August of last year, which followed the Brexit referendum result, and means that almost four million households will be facing a rise in mortgage payments as a result, particularly those with a variable mortgage rate.
The rise is the first since 2007 and the Bank estimates that almost two million mortgage holders have not experienced an interest rate rise since taking out a mortgage. With that in mind, many mortgage holders and people looking to access lending for a house purchase will be asking, what does the interest rate rise mean for me?
A modest impact
According to UK Finance, the average outstanding mortgage balance is the UK is £89,000 which would see payments increase by between £11 and £12 a month. The impact is relatively slight for those affected, but financial conditions in recent years have altered the mortgage market, with more people taking advantage of fixed mortgages in recent years.
Nationwide chief economist Robert Gardner said the share of mortgages on variable rates – which will be affected by the interest rate rise - has fallen to a record low of around 40 per cent, down from a peak of 70 per cent in 2001.
The type of mortgage you have will impact how significantly you are affected.
It is important to look into the type of mortgage you may have, particularly people who have not changed their mortgage in the last five years, as it is likely any fixed-term will have ended and you may have moved onto a variable rate deal, which means it is susceptible to rate rises.
Those with a mortgage in place should look to access fixed-rate deals, as even though new deals will increase in line with the rate rise, it adds additional security should the Monetary Policy Committee increase rates in the future.
Good news for savers
While the interest rate rise will impact those on variable rate mortgages and impact on future offers from lenders, first-time buyers can offset the impact through the use of savings accounts. The Bank of England outlined that the average easy-access savings account currently pays 0.14 per cent interest. The rise in interest rates will see this increase, but the rate remains low.
Accessing the best possible rates for savings accounts is paramount for those looking to access lending for a new home, as the larger a deposit, the more options available when it comes to securing a favourable mortgage. Nationwide, TSB and Yorkshire Banks have all promised to increase their variable savings rates following the Monetary Policy Committee’s decision, so there is some light at the end of the tunnel for savers.
Despite promises to increase savings rates, it is unlikely major high-street banks will offer rates high enough to benefit housebuyers through their easy-access accounts. It is vital people seek out high-interest accounts or even look to lesser-known providers for the best rates around.
Use our mortgage calculator, created with the Mortgage Advice Bureau, to work out the best deal for you.