The Bank of England increased the interest rate yesterday from 0.25% to 0.5% after a decade. If you are a saver then this is good news for you, but if you have a variable-rate mortgage this will inflict some costs. This is how it will affect your money.

The interest rate decision will impact households, homebuyers, credit card rates, personal loans’ costs and overdrafts. Fixed-rate mortgage homeowners won’t be impacted, as Nationwide chief economist Robert Gardner said, and savers “who have endured years of pitiful returns on their money,” will get some relief with the rate rise.

Mortgage Costs

The Daily Mail reported that mortgage costs “rose in minutes” yesterday, while “young homeowners faced the first rate rise of their adult lives.” 75% of homeowners are on fixed-rate deals so their monthly payments will stay the same, despite the interest rate rise. But among these, many are on short two-year fixed rate mortgages, which means that when they have to renew them in two years-time they will be facing a more expensive rate.

The Royal Bank of Scotland, NatWest and Ulster Bank North base rate rose yesterday in line with the BoE’s interest rate rise. However, as RBS/NatWest pointed out, “Existing customers with fixed-rate products will not see a change in their rate during their fixed-rate period.  We are currently reviewing whether we will make any changes to variable-rate products and will provide an update in the near future.”

The Yorkshire Building Society said that borrowers on a Yorkshire, Chelsea or Norwich Peterborough standard variable rate mortgage will see a 0.25% increase on their rate to 4.99%. The Accord Mortgages SVR will be reduced, however, from 5.34% to 4.99%, with borrowers’ monthly repayments decreasing.

HSBC’s tracker mortgages will also be increased on Friday since they are linked to the base rate. The bank’s statement said: “On average, those with an HSBC tracker mortgage with £100,000 balance would see a monthly increase of £12 per month and an increase of £24 for those with a £200,000 outstanding balance.” In regards to savings accounts, HSBC noted that “While our savings rates are not directly linked to the Bank of England base rate, we will be reviewing these in light of this decision and other factors, and will make our customers aware of changes in savings rates at the earliest opportunity.”

The Guardian explained that mortgages would go up £22 a month “if you are the average homebuyer with the typical mortgage in Britain of £175,000. The 500,000 borrowers on one of the most popular deals, Nationwide’s base mortgage rate tracker, will see their interest rise from 2.25% to 2.5%, taking the monthly bill from £763 to £785 on a £175,000 loan.”

Ben Broadbent, the deputy governor for monetary policy at the BoE discussed this morning the interest rate decision on BBC Radio 4’s Today programme and commented on the impact of the rise: “There will be some [pain] and it’s one part of how monetary policy works. Equally one should keep this in context. Around a third of households have owner-occupied mortgages, interest payments on debt - in aggregate - for households, are lower than they’ve ever been, relative to income, and this is a moderate rise. One should also bear in mind there are people who derive income from deposits so you’re right, but I think one should keep the scale of this in context.”

Homeowners’ Worries

For many homeowners, the main concern isn’t the interest rate rise yesterday, but the possibility of future ones coming. What happens if the rates increase further and how will they manage to afford their mortgages, are some of their questions which have driven many to fix their mortgages’ rate immediately. This will enable them to have a sense of security on their monthly payments and budget for their living expenses. Since the future remains unpredictable and Brexit uncertainty will continue to weigh on the pound, securing a fixed rate mortgage is one way to control your costs.

Zombie companies

Things are difficult for companies too, especially those which have been struggling for some time now having to deal with increased costs and the rise of the minimum wage, higher fuel prices and increased import costs due to a weak pound. These zombie companies, with a negative net worth, shambling around like the undead, kept alive by low interest rates and feeding on an increasingly flexible labour market, are unable to invest in growth.  With interest rates going up, more and more of these businesses might be too weak to continue.

Will the rates increase more?

The UK consumer who is already indebted, through mortgages and credit, and who isn’t seeing any real wage increase, will find it extremely difficult if interest rates increase even more. Already, many households are struggling financially, with higher prices and less money in their pockets. 

As economist Philip Shaw at Investec said, near-zero interest rates aren’t exactly “healthy,” but the timing of the hike isn’t fortunate either: “Household budgets are under pressure and higher interest rates may bring about a further reaction by consumers, slowing the economy further. Activity is also vulnerable to a retracement of corporate activity on the back of Brexit-related uncertainty.”

For many, the interest rates won’t rise anytime soon so that the BoE has the opportunity to assess the situation and see how consumers and businesses are doing after the rate hike. Others feel that the rate rise decision shouldn’t have been made in the first place, let alone followed by another one, and believe that it would be reversed soon.