What does a 1% base rate mean for savers and mortgage borrowers


The Bank of England has upped the base rate for the fourth time since December as it attempts to keep a lid on soaring inflation.

The base rate has risen from 0.75 per cent to 1 per cent, having been previously upped from 0.1 to 0.75 per cent in the previous three successive rises.

This is the first time since February 2009 that the base rate has been at 1 per cent, when it headed downwards following the financial crisis in 2008.

Quickfire: The Bank of England has upped the base rate for the fourth time in less than five month.

The decision taken by the Monetary Policy Committee today was made due to inflationary pressures, although economists suggest it will do little to stem cost of living rises triggered by energy, petrol and food prices.

Savers will be hoping that the base rate rise will mean they get better rates on their savings accounts. 

Most homeowners who have fixed rate mortgage deals won’t be affected immediately, but are likely to find remortgaging in future more expensive.

Those with variable rate mortgages are likely to see monthly costs rise imminently. 

Why raise interest rates?

With inflation at 7 per cent as of March and expected to peak over the coming months, the Government’s 2 per cent inflation target is far from being met.

The base rate determines the interest rate the Bank of England pays to banks that hold money with it and influences the rates those banks charge people to borrow money.

By raising the cost of borrowing, monetary policy seeks to lower demand for it, which dampens the economy and the amount of money banks create in new loans.

A better return on savings also encourages people to put more money aside, but with rates near rock bottom the effect is negligible.

Savers will be hoping that the base rate will inject further stimulus into the savings market, particularly given that rates have not risen by as much as some might have hoped, following the previous three base rate decisions.

Mortgage borrowers will be preparing for further rate hikes, with the Bank of England’s decision likely to drive up the cost of borrowing. Mortgage rates have already risen substantially over the past months from the record lows they were at.

Rising costs: Servicing a mortgage will become more expensive for those on variable rates, and for those taking out a new fixed mortgage

Rising costs: Servicing a mortgage will become more expensive for those on variable rates, and for those taking out a new fixed mortgage 

What does it mean for my mortgage?

The rising base rate has driven up the cost of mortgages since it first increased at the end of 2021, and this decision looks set to edge them up further – although how borrowers will be affected and when depends on what type of mortgage they have.

Alastair Douglas, chief executive of finance app TotallyMoney, said: ‘As the Bank of England increases the base rate to ease inflationary pressures, the 2million homes on variable-rate and tracker mortgages will see their household finances squeezed even more.

‘And the situation isn’t going to get much better for those nearing the end of their current deals. 

‘They have a choice of facing the more expensive SVR or having to switch to a new, and more expensive fixed-rate product.’

Variable rates

Those on their lender’s standard variable rate, discount deals, or a base rate tracker mortgage are the only borrowers that will see their payments increase immediately.

This represents around 20 to 25 per cent of existing mortgage holders, depending on which estimate you look at.

According to financial information service Moneyfacts, the average SVR has increased from 4.41 per cent in November 2021, when the base rate was still at 0.1 per cent, to 4.78 per cent today.

Time to remortgage? For those who can, switching from a standard variable rate to a fixed rate could save thousands

Time to remortgage? For those who can, switching from a standard variable rate to a fixed rate could save thousands

In real terms, that would mean that someone with a typical £150,000 standard variable rate mortgage is paying £30 more per month than they were in November.

Someone taking out that mortgage today would pay almost £10,000 more over a 25-year term that someone taking out the same mortgage last November.

For those that are able to, switching from a standard variable rate mortgage to a fixed deal could cut their monthly payments substantially.

Rachel Springall, finance expert at Moneyfacts, said: ‘The decision to increase base rate will be disappointing news to consumers who are already facing a cost of living crisis, with further rises anticipated over the next 12 months.

‘Borrowers sitting on a variable rate may want to lock into a competitive fixed rate mortgage deal to protect themselves from rising interest rates, perhaps sooner rather than later.

‘Switching from a standard variable revert rate to a fixed rate could significantly reduce someone’s mortgage repayment.’

According to Moneyfacts, switching from a 4.78 per cent standard variable rate to a 3.03 per cent two-year fix would save approximately £4,611 over two years, for someone with a £200,000 mortgage on a 25-year term.

Meanwhile, the typical SVR is also likely to continue to rise, especially if there are further base rate increases in future. 

On the same £200,000 mortgage, a rise of 0.25 percentage points on the current SVR of 4.78 per cent would add approximately £695 on to total repayments over two years.

Fixed rates

Homeowners who have fixed rate mortgage deals won’t be affected immediately, as they are locked in to their current rate until that fixed term ends.

However, they are likely to find remortgaging in future more expensive. While fixed rate mortgages are not directly linked to the base rate, banks and building societies usually choose to increase them when the base rate goes up.

This is because a higher base rate increases the price of borrowing for banks – and they want to recoup some of this additional cost from their customers.

Fixed mortgage rates have broadly been rising since the base rate was first increased in December 2021.

According to the financial information service Moneyfacts, the typical two-year fixed-rate mortgage – covering all deposit sizes – had an interest rate of 2.29 per cent in November 2021. That has now risen to 3.03 per cent.

For a £150,000 mortgage, that would mean a £56 rise in monthly payments for someone taking out the mortgage today, compared to November.

The typical mortgage rate has been on the rise since November, according to Moneyfacts

The typical mortgage rate has been on the rise since November, according to Moneyfacts

For five-year deals, the average has risen from 2.59 per cent to 3.17 per cent – a £45 rise based on the same mortgage terms.

But these rates, and people’s monthly payments, are likely to rise further thanks to today’s base rate rise.

According to Totally Money, payments on the average mortgage with a 25 per cent deposit, taken out on a property costing £270,708, would increase by £1,188 annually if their interest rate went up by 1 per cent. 

According to the forecast, the increase would be £1,440 for those with a 10 per cent deposit and £948 for a 40 per cent deposit mortgage. 

This is based on a rate of 1.5 per cent increasing to 2.5 per cent for 40 per cent and 25 per cent deposit mortgages, and and 1.65 per cent to 2.65 per cent for 10 per cent deposit mortgages. 

According to Totally Money, those taking out new, 10% deposit mortgages could be paying £1,440 more per year than when the base rate was 0.1% - bad news for first-time buyers

According to Totally Money, those taking out new, 10% deposit mortgages could be paying £1,440 more per year than when the base rate was 0.1% – bad news for first-time buyers

However, for those looking to remortgage there are still deals out there which are substantially cheaper than these averages – especially for those with large deposits or substantial equity.

For example, someone buying a £150,000 home with a 40 per cent deposit (£60,000) could get a rate of 2.2 per cent on a two-year fix with NatWest – though it comes with a £995 fee.

On a five-year fix, Nationwide offers a 2.24 per cent rate on the same terms, with a £999 fee.

David Hollingworth of mortgage broker L&C said those on fixed rates should plan for when this comes to an end, especially as rates can sometimes be secured up to six months in advance of the remortgage date. 

He said: ‘Many borrowers will already be on a fixed rate so will be feeling the benefit of their decision to lock in a rate. 

Some borrowers are starting their remortgage sooner to get ahead of the increases in fixed rates 

‘It still makes sense to assess when that fix will come to an end and prepare for the point when a switch will be required. Some borrowers are starting their remortgage process sooner to get ahead of the increases in fixed rates.’

Two-year fixes were historically much cheaper than five-year, but the gap is narrowing as more borrowers seek to lock in their rate for longer and guard against future rate rises.

Springall said: ‘Fixing for longer may be a logical choice for peace of mind with mortgage payments when other household costs are increasing.

‘The differential rate between the average two-year and five-year fixed mortgage rate is much smaller than in previous years.’

However, borrowers needing to move home during a fixed term may need to pay early repayment charges, so future plans must be considered.

> Check the best mortgage rates you could apply for and see monthly costs with our L&C-powered calculator

Will it impact house prices? Here’s what experts are saying 

Rising mortgage interest could eventually slow down house price growth

Rising mortgage interest could eventually slow down house price growth 

Some have suggested that rising mortgage payments, alongside increases in the cost of living, could serve to dampen the hot housing market and slow down the runaway price growth witnessed since the start of the pandemic. 

Here is what property experts had to say on the topic following today’s base rate rise: 

Tom Bill, head of UK residential research at agent Knight Frank: ‘The base rate increase will not by itself have an impact on house prices, but will contribute to a slowdown that appears to be underway. 

‘Growth will calm down as the cost-of-living squeeze gradually takes it toll on demand and mortgage lenders continue to pull their best products from the market. We forecast UK prices will grow by 5 per cent this year.’

Tim Bannister, Rightmove’s director of property science: ‘Despite further rises being a possibility this year, right now the data suggests this is not dampening the desire for people to move. Buyer demand is still up around 60 per cent from the more normal 2019 market. 

‘People will need to make decisions around what they can afford, which may mean some people need to lower the property price bracket they are aiming for, assess the mortgage products available in terms of duration and fixed-rate length, or raise a higher deposit in order to borrow less.’

Lucian Cook, head of residential research at agent Savills: ‘It remains difficult to see the trigger for a meaningful house price correction, given the strength in the employment market and the fact interest rates remain low in a historical context. 

‘This said the four successive rate rises and the rising cost of living are likely to bring more caution over coming months which will mean that rate of price growth slows progressively, potentially to low single digit figures in coming years. That will probably come as a relief would-be buyers.’ 

What does it mean for savers?

While it is potentially bad news for mortgage borrowers, the base rate rise will be welcomed by savers.

Were savers to see 0.25 per cent passed onto them, it would mean receiving £50 more a year in interest based on a £20,000 deposit.

The three previous quickfire base rate rises have seen rates ticking upwards over recent months.

The average easy-access account has risen by 0.2 percentage points since the first rate rise in December, according to Moneyfacts, from 0.19 to 0.39 per cent.

However, while some savers will have seen their rates rise by more than the average, many will still have their cash festering in accounts paying next to nothing.

Rate rise? Savers could see interest nudge up following today's decision

Rate rise? Savers could see interest nudge up following today’s decision

On Sunday, Britain’s biggest building society, Nationwide, nudged rates on all its easy-access accounts, up by 0.1 per cent. Customers will now earn between 0.11 and 0.15 per cent.

HSBC, Lloyds Bank, Santander and NatWest have also all recently upped their 0.01 per cent easy-access rates to just 0.1 per cent.

TSB and Halifax have both gone a little higher offering savers 0.15 per cent for using their easy-access savings accounts, whilst Barclays hasn’t even bothered – its Everyday Saver continues to pay 0.01 per cent.

Rachel Springall, finance expert at Moneyfacts said: ‘Loyal savers who have an easy-access account with one of the biggest high-street brands are seeing little benefit from base rate rises

‘Many of these brands have passed on just 0.09 per cent since December 2021 and none have passed on all three base rate rises, which equate to 0.65 per cent.’

However, whilst the big banks continue to insult their customers by paying rock bottom rates, it is at the top of the market, where savings rates are beginning to look more appealing.

Since the last base rate rise on the 17 March, the best easy-access deals have moved beyond 1 per cent. 

Zopa Bank pays 1.2 per cent, Aldermore pays 1.25 per cent and now Gatehouse Bank pays 1.3 per cent.

JP Morgan’s Chase bank is also offering a savings account, linked to its current account – which is app-only – offering a rate of 1.5 per cent.

Someone depositing £10,000 into this account could expect to see a £150 return after one year.

At this exact time last year, the best deal on the market would have reaped three times less – a mere £45 from the same £10,000 deposit.

Springall adds: ‘The top rate tables for easy access accounts are experiencing some rivalry from challenger banks, which is great news for savers who prefer to keep their cash close to hand.

‘There is no certainty for a top rate deal to last very long, but consumers can easily switch between accounts if they desire.

‘Overall, it is positive that savings rates are rising and hopefully will continue to do so in the weeks to come.’

For those considering putting their money in a fixed rate savings deal, the upward movements has been more noticeable.

The average one-year fixed rate has risen by 0.43 percentage points during that time, from 0.84 to 1.27 per cent.

Since the previous base rate rise, the top one-year fixed rate deals have also breached the 2 per cent mark. There are now more than 10 savings providers paying 2 per cent or more.

Prior to the December base rate rise, Gatehouse Bank was offering the best one-year deal paying 1.41 per cent, whilst Zopa Bank offered the best two-year deal paying 1.61 per cent.

Today, the best one-year deal has risen by 0.7 per cent, paying 2.11 per cent, whilst the best two-year deal has risen by 0.79 per cent, and is now paying 2.42 per cent.

BEST FIXED-RATE ACCOUNTS 
Type of account (min investment)                   0% tax 20% tax 40% tax
ONE YEAR                         
Al Rayan Bank (£5,000+) (3)                    2.11 1.69 1.27
Atom Bank (£50+)                    2.05 1.64 1.23
Charter Savings Bank (£5,000+)                    2.05 1.64 1.23
Close Brothers Savings (£10,000+)                    2.05 1.64 1.23
Gatehouse Bank (£1,000+) (3)                    2.05 1.64 1.23
Investec (£5,000)                    2.05 1.64 1.23
TWO YEARS                  
Al Rayan Bank (£5,000+) (3)                    2.42 1.94 1.45
Atom Bank (£50+)                    2.40 1.92 1.44

While another 0.25 per cent base rate rise is unlikely to send rates soaring, savers can expect to see more of the same over the coming weeks and months.

Since the last base rate rise, around 74 providers have increased at least some of their existing variable rates, according to Savings Champion.

Although, not all accounts have changed and none of these providers have passed on the full base rate rise to savers, Anna Bowes, co-founder of Savings Champion believes we will continue to see upward movement at the top of the market.

‘This is the first time the base rate has been at 1 per cent since February 2009 when it was heading downwards following the Financial Crisis in 2008,’ said Bowes.

‘There is some momentum now, so hopefully we shall see more rate increases from savings providers.

‘This could mean that best buy easy access rates rise further still, as well as fixed term bonds.’

With rates likely to continue moving upwards – driven by competition between challenger banks and further base rate rises, which are expected in the near future, savers may feel cautious of switching due to the danger of missing out on a better deal.

By keeping savings in an easy-access account it will be possible to withdraw your cash as and when you please and move to a new provider when you so wish.

However, if savers are using easy-access accounts as a safety-net, they must check that they will not get penalised for withdrawals as some deals have certain restrictions in place.

For savers looking for the best returns, then fixed rates are a good option.

However, they would be wise to be wary of locking into longer fixed rate deals. For those weighing up a fix, the advice is to do so for no more than a year.

James Blower, founder of The Savings Guru says: ‘One year fixed rates are now at the highest levels since April 2019 and I can only see them continuing upwards for now.

‘I’d certainly suggest to savers not to lock up beyond one year – with one year best rates at 2.11 per cent and the best five year deal at 2.6 per cent there’s not enough premium to justifying doing so in a rising rate market.’

THIS IS MONEY’S FIVE OF THE BEST CURRENT ACCOUNTS

Santander’s 123 Lite Account will pay 3% cashback on household bills. There is a £2 monthly fee and you must log in to mobile or online banking at least once every 3 months, deposit £500 per month and hold two direct debits to qualify.

Santander

Virgin Money’s M Plus Account offers £20,000 Virgin Points to spend via Virgin Red when you switch and pays 2.02 per cent monthly interest on up to £1,000. To get the bonus, £1,000 must be paid into a linked easy-access account paying 1% interest and 2 direct debits transferred over.

NatWest

Halifax’s Reward Current Account pays £125 to when you switch to the account. It also offers the choice of £5 a month paid into your account, two film rentals or three magazines, or a free cinema ticket each month. There is no cost if you pay £1,500 each month, otherwise a £3 fee applies.

Santander

First Direct will give newcomers £150 when they switch their account. It also offers a £250 interest-free overdraft. Customers must pay in at least £1,000 within three months of opening the account.

Nationwide

Nationwide’s FlexDirect account comes with up to £125 cash incentive for new and existing customers. Plus 2% interest on up to £1,500 – the highest interest rate on any current account – if you pay in at least £1,000 each month, plus a fee-free overdraft. Both the latter perks last for a year.

Barclays

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