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| Version 25 | Version 26 |
|---|---|
| Interest rates: How a rise affects you and your money | Interest rates: How a rise affects you and your money |
| (about 4 hours later) | |
| The Bank of England has put up interest rates 14 times in a row in an attempt to slow rising prices. | |
| In August, the Bank rate, set by the Monetary Policy Committee, went up to 5.25% from 5%. | |
| That means further pain for some homeowners, but is better news for savers. | |
| How high could interest rates go? | How high could interest rates go? |
| The Bank rate is currently at its highest level for 15 years. | The Bank rate is currently at its highest level for 15 years. |
| The theory is that raising interest rates makes it more expensive to borrow money, meaning people have less to spend, reducing demand and inflation. | The theory is that raising interest rates makes it more expensive to borrow money, meaning people have less to spend, reducing demand and inflation. |
| The Bank has put up rates 14 consecutive times since December 2021 to try to bring inflation closer to its target of 2%. | |
| But, so far, the impact has been limited and is likely to take more time to feed through. | But, so far, the impact has been limited and is likely to take more time to feed through. |
| Prices rose by 7.9% in the year to June, according to the Office for National Statistics (ONS). This was lower than 8.7% in the year to May, and down from the peak of 11.1% in October 2022. | Prices rose by 7.9% in the year to June, according to the Office for National Statistics (ONS). This was lower than 8.7% in the year to May, and down from the peak of 11.1% in October 2022. |
| However, that is still almost four times the Bank's 2% target. | However, that is still almost four times the Bank's 2% target. |
| Concerns also remain over the "core inflation" rate - a measure which strips out volatile factors such as food and energy. Although it dipped slightly in June, it is still relatively high. | Concerns also remain over the "core inflation" rate - a measure which strips out volatile factors such as food and energy. Although it dipped slightly in June, it is still relatively high. |
| As a result, there is uncertainty about what will happen in the coming months, although financial markets now think rates won't rise as high as previously thought. | |
| At one point, UK rates were expected to rise above 6%, but now markets expect the peak rate to be below 6%. | |
| The Bank has to balance the risk of damaging the economy, which has shown little sign of growth, with the need to slow price rises. | The Bank has to balance the risk of damaging the economy, which has shown little sign of growth, with the need to slow price rises. |
| Its Monetary Policy Committee meets eight times a year to decide rates. | |
| Why does the Bank of England change interest rates? | Why does the Bank of England change interest rates? |
| How do interest rates affect me? | How do interest rates affect me? |
| Mortgages | Mortgages |
| Just under a third of households have a mortgage, according to the government's English Housing Survey. | Just under a third of households have a mortgage, according to the government's English Housing Survey. |
| When interest rates rise, more than 1.4 million people on tracker and standard variable rate (SVR) deals usually see an immediate increase in their monthly payments. | When interest rates rise, more than 1.4 million people on tracker and standard variable rate (SVR) deals usually see an immediate increase in their monthly payments. |
| The rise from 5% to 5.25% means those on a typical tracker mortgage would pay about £24 more a month. Those on SVR mortgages would face a £15 jump. | |
| Three-quarters of mortgage customers hold fixed-rate deals. | Three-quarters of mortgage customers hold fixed-rate deals. |
| Their monthly payments may not change immediately, but higher interest rates mean housebuyers - or the 1.8 million people expected to remortgage this year - will have to pay a lot more than if they had taken out the same mortgage a year or more ago. | Their monthly payments may not change immediately, but higher interest rates mean housebuyers - or the 1.8 million people expected to remortgage this year - will have to pay a lot more than if they had taken out the same mortgage a year or more ago. |
| An average two-year fixed deal, which was 2.29% in November 2021, is now well above 6%. | An average two-year fixed deal, which was 2.29% in November 2021, is now well above 6%. |
| The so-called "mortgage bomb" has become a huge economic and political issue. | The so-called "mortgage bomb" has become a huge economic and political issue. |
| As people roll off cheap fixed-rate deals onto products with much higher rates, their monthly repayments can soar by hundreds of pounds. | As people roll off cheap fixed-rate deals onto products with much higher rates, their monthly repayments can soar by hundreds of pounds. |
| The IFS, a politically independent think tank, warns rising interest rates could mean 1.4 million mortgage holders see their disposable income fall by more than 20%. | The IFS, a politically independent think tank, warns rising interest rates could mean 1.4 million mortgage holders see their disposable income fall by more than 20%. |
| You can see how your mortgage may be affected by rising rates with our calculator: | You can see how your mortgage may be affected by rising rates with our calculator: |
| If you can't see the calculator, click here. | If you can't see the calculator, click here. |
| Credit cards and loans | Credit cards and loans |
| Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans. | Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans. |
| But even in April the average annual interest rate was 21.86% on bank overdrafts and 20.13% on credit cards. | But even in April the average annual interest rate was 21.86% on bank overdrafts and 20.13% on credit cards. |
| Lenders could decide to put prices up further, if they expect higher interest rates in the future. | Lenders could decide to put prices up further, if they expect higher interest rates in the future. |
| Low interest rates are good for borrowers, but bad for savers | Low interest rates are good for borrowers, but bad for savers |
| Savings | Savings |
| Individual banks and building societies usually pass on interest rate rises to customers. | Individual banks and building societies usually pass on interest rate rises to customers. |
| There are some good deals on the market, so analysts say that customers should shop around, as many will be on accounts paying little or nothing. | There are some good deals on the market, so analysts say that customers should shop around, as many will be on accounts paying little or nothing. |
| The UK's financial watchdog recently warned that banks will face "robust action" if they offer unjustifiably low savings rates to their customers. | |
| Although many saving accounts are paying more, even the best interest rates aren't keeping up with inflation. | |
| This means the value of cash savings - its buying power - is falling in real terms. | This means the value of cash savings - its buying power - is falling in real terms. |
| Why have prices been going up? | Why have prices been going up? |
| Inflation has gone up worldwide, after Covid restrictions eased and consumers spent more. | Inflation has gone up worldwide, after Covid restrictions eased and consumers spent more. |
| Many firms experienced problems getting enough goods to sell. Oil and gas costs were also higher than they had been - a problem made worse by Russia's invasion of Ukraine. | Many firms experienced problems getting enough goods to sell. Oil and gas costs were also higher than they had been - a problem made worse by Russia's invasion of Ukraine. |
| Although many elements of inflation are global, there are also domestic factors at play in the UK, including rising wages. | Although many elements of inflation are global, there are also domestic factors at play in the UK, including rising wages. |
| Are other countries raising their interest rates? | Are other countries raising their interest rates? |
| Central banks around the world have also been raising interest rates to try to tackle high inflation. | |
| The US central bank has announced big rate rises which have taken its key rate to levels not seen for 22 years. | The US central bank has announced big rate rises which have taken its key rate to levels not seen for 22 years. |
| The European Central Bank recently raised interest rates in the eurozone to a joint record high. | The European Central Bank recently raised interest rates in the eurozone to a joint record high. |
| Related Topics | Related Topics |
| Savings | Savings |
| Money | Money |
| Personal finance | Personal finance |
| Cost of living | Cost of living |
| UK economy | UK economy |
| Bank of England | Bank of England |
| Mortgages | Mortgages |