Households should expect less cheap credit and a period of belt tightening as overburdened budgets run out, some experts say.
They sounded the warning when the Bank of England announced a 0.15 percentage point hike in the base rate to 0.25%.
The move will have an immediate impact on households on variable mortgage agreements that directly track the base rate.
Borrowers on Standard Variable Rate Agreements (SVRs) may also see their costs increase, although SVR rates are set by lenders individually.
About 850,000 mortgage borrowers have a follow-up rate mortgage, according to the UK Finance trade association, which estimates that the 0.15 point increase will lead to a typical increase in repayments of Â£ 15.45 per month.
For those on an SVR – around 1.1 million mortgage borrowers – this increase translates into an estimated increase of Â£ 9.58 per month on average.
However, many homeowners are stuck in fixed rate mortgage deals and will be protected from the immediate impact of the base rate hike.
About three quarters (74%) of mortgages are fixed rate, according to figures from UK Finance. He said 96% of homeowners’ mortgages since 2019 have been fixed-rate, with the majority opting for two- or five-year agreements.
The increase in the bank rate may seem small on its own, but on top of the already high costs of fuel, energy and food, it will be another drain on many overburdened household budgets.
Charles Roe, Director of Mortgages at UK Finance, said: âToday’s interest rate hike marks an increase from historically low levels. Over 74% of mortgage customers have purchased a fixed rate product and will not see any immediate change in their mortgage payments.
âFor those who have reached the end of their contract, a wide range of mortgage products are available and we encourage homeowners to shop around and choose the one that best suits their situation.
âAll clients with concerns about managing their mortgage should contact their lender who will be able to explore the range of individual assistance options available. “
Paul Broadhead, Head of Mortgage and Housing Policy at the Building Societies Association, added: âLenders are sensitive to the growing number of people facing a tight household budget and the advice to anyone concerned about their ability to to pay your mortgage is to contact us. early with their lender. Lenders will do whatever they can to help.
The additional costs for some borrowers come as the cost of living rises, with inflation hitting 5.1% in November, its highest level in more than a decade.
Andrew Hagger, a personal finance expert at Moneycomms.co.uk, said: âThe increase in the discount rate may seem small in isolation, but on top of the already high costs of fuel, energy and food , this will be an additional burden on many overburdened household budgets.
The bad news is that this will likely be the first in a series of rate hikes in 2022 and that, coupled with higher municipal tax bills and a significant increase in the energy price cap in the spring, will only add to the widespread financial misery. “
Ed Monk, Managing Partner of Fidelity International, warned: âAn increase in UK borrowing costs will not ease clogged supply chains or reduce shipping costs.
“The signal today’s rate hike is sending is that we should expect a period of belt tightening and less cheap credit from now on.”
Andrew Montlake of broker Coreco said that while many people may have been caught “off guard” by Thursday’s decision: “The reality is that this increase has already been incorporated and will therefore have little effect on available mortgage products. currently.
âThe real question is whether this is the start of a trend over the next 12 months and how ready the bank is to harden.
“I expect to see increased clamor for borrowers to correct where they can, with many of them worrying that they have never experienced a rate hike before.”
Rachel Springall, finance expert at Moneyfacts.co.uk, said competition in the mortgage market was ‘alive’ this year – and some borrowers might find they can save money by switching from a variable rate to a fixed contract.
While the costs of some borrowers will rise, savers hope that the hike in the base rate will bring them better deals.
But Ms Springall cautioned: “This base rate change may take a few months to trickle down to savers who have a floating rate agreement, but there is also no guarantee that the rate will be theirs in full. or not at all reflected. “
Examining the impact of eroding inflation on household savings, the website SavingsChampion.co.uk calculated that a Â£ 50,000 deposit left in a mainstream bank account earning 0.01% could be worth around Â£ 11,000 less in real terms after five years, based on the current inflation rate.
Anna Bowes, co-founder of SavingsChampion.co.uk, said savings rates tend to fall more when the base rate is reduced and rise less as the base rate increases.
She said: âThe link between the base rate and provider savings rates has come loose over the years and some providers have not raised their rates at all after the last base rate hike in 2018. – others with much lower margins than you would have. wait.
âThe bottom line is that you can’t depend on your savings provider to pass on a base rate hike in full, or sometimes not at all. There is no hard and fast rule and some providers will be better than others.
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