Interest rates rise to 4.25% - what does it mean for your money?

The Bank of England has increased the base rate for the 11th time in a row. We look at whether rates could rise further this year, and what the latest hike means for your mortgage and savings

percentage sign on a wooden block with stacks of coins in the background
(Image credit: Getty images)

The Bank of England has increased the base rate from 4% to 4.25%, marking the 11th rise in a row.

The rate is at its highest level for 14 years. Interest rates have soared over the past year; last March, the base rate was just 0.75%.

The rise follows a surprise jump in inflation last month to 10.4%, pushed up by vegetable shortages. The cost of living is running at more than five times the Bank of England’s 2% target.

Raising interest rates helps to control inflation; however, the Bank of England’s Monetary Policy Committee (MPC) was not unanimous about its decision to hike rates to 4.25%.

While seven members voted to increase base rate by 0.25 percentage points, two members preferred to maintain the rate at 4%.

The rate hike will pile more pressure on millions of households struggling with the cost of living crisis. It will impact homeowners on variable mortgages - and those with fixed deals about to expire - and could affect personal loan and credit card customers too.

Alice Haine, personal finance analyst at the investment platform Bestinvest, comments: “For households still adjusting to the shock jump in inflation to 10.4%, another interest rate rise might feel like a hammer blow to finances already squeezed to the max by the never-ending cost-of-living crisis. 

“The only comfort lies in the slightly gentler uplift of 25 percentage points instead of the 50 points seen at the past two MPC meetings and the 75-point rise in November last year.”

It’s good news for savers though, who will be watching closely to see which banks and building societies push their rates up as a result of the announcement.

We look at whether interest rates will continue rising this year, and how the rate hike will impact your household finances, whether you have a mortgage, savings or loan.

Will interest rates keep rising in 2023?

Interest rates are at a 14-year high. Last time rates were this high was in October 2008, when base rate was sitting at 4.5%.

Last month the governor of the Bank of England suggested interest rates might have peaked after hiking them to 4%.

However, an unexpected jump in inflation has caused the MPC to raise rates again today. 

The notes accompanying the Bank of England’s announcement mention that “it remains likely [that inflation will] fall sharply over the rest of the year”, suggesting that interest rates may be nearing a peak.

Today’s increase from 4% to 4.25% is also smaller than recent rises.

The next interest rate announcement will be on 11 May, at which point we could see a discussion over pausing rate rises as the Bank’s economists also release their quarterly forecast for inflation. 

The consultancy Capital Economics forecasts that the Bank will hike rates once more in May, to 4.5%, before cutting rates to 3% in 2024.

Impact of rising interest rates on mortgages

Almost 2 million homeowners are on a variable mortgage, such as a tracker deal or standard variable rate (SVR). 

Tracker mortgages will automatically go up as a result of the interest rate rise, pushing up homeowners’ monthly mortgage payments. Those on SVRs should look out for a message from their lender on whether it will increase their interest rate and when this will take effect. 

According to research by TotallyMoney and Moneycomms, the jump in Bank rate to 4.25% means a typical household with a variable mortgage could see their monthly mortgage repayments rise by £26. This is based on the average UK property costing £270,708 with a 75% loan-to-value mortgage.

It means customers will be forking out an extra £456 each month compared to December 2021, just before the series of Bank rate hikes began.

Homeowners with a larger property worth £400,000 would see an extra £48 added to their monthly mortgage bill. 

We have more analysis on how higher interest rates affect mortgage payments and what homeowners and first-time buyers should do in What will a Bank of England interest rate rise mean for your mortgage rate and payments?

If you are struggling with your mortgage payments, it’s important to speak to your lender - don’t bury your head in the sand and miss a payment, as this could have major consequences and leave a black mark on your credit report. Your lender may be able to help by temporarily reducing your rate, giving you longer to make payments, extending the term, or switching your loan to interest-only. 

If you’re a first-time buyer or about to remortgage, it can be tricky working out whether a variable or fixed-rate mortgage is the best option right now, as it will depend on how interest rates change in future.

Richard Campo, founder of mortgage broker Rose Capital Partners, has this advice: “In simple terms, if you feel interest rates will fall in the future, taking a variable rate such as a tracker may be the cheapest option over the next two years. While currently this type of mortgage product is more expensive than some of the fixed-rate options, you will win in the latter stages as interest rates fall.

“Conversely, if you believe there are more rate rises to come, then a longer-term fixed rate over 5 or 10 years may be the best option as they are cheaper than their variable-rate counterparts.”

The average two-year fixed-rate mortgage is currently 5.32% while the average five-year fix is 5%, according to the data website Moneyfacts

Impact of rising interest rates on savings

Savers will likely be delighted with today’s announcement. But don’t forget that banks and building societies do not have to pass the base rate rise onto savers. Those that do may not do so immediately, some may only hike rates by a smaller amount than the full 0.25 points, while others may keep savings rates frozen for now.

Having said that, savings rates have already risen this year. The average easy-access account pays 1.85%, up from 1.73% a month ago, according to Moneyfacts. The average rate on an easy-access cash ISA pays 2.01%, up from 1.85% in February.

Rachel Springall, finance expert at Moneyfacts, says: “Savers may be pleased to see another rise to the base rate, but they must take time to check their existing savings pots to see if they are earning a competitive return. Not every savings provider will pass on a base rate rise, so it’s crucial for savers to ditch and switch if they find a better return elsewhere. 

“If savers are comparing their easy-access savings accounts, they will find challenger banks and building societies are offering some of the best returns, whereas the majority of the biggest high-street brands pay less than 1%.”

The best instant-access account that is open to everyone is currently Chip Instant Access Saver, paying 3.4%. The minimum deposit is £1, while the maximum is £25,000.

If you’re happy to tie your money up for two years, you can get 4.5% from the Cynergy Bank 2 Year Fixed Saver.

Check out our article on the best savings rates to discover the other top accounts right now. 

Impact of rising interest rates on borrowing

Today’s interest rate increase means the cost of borrowing on a credit card or via a personal loan could also go up.

Haine at Bestinvest comments: “A higher base rate is never good news for borrowers as more of their disposable income gets gobbled up by interest payments on loans, mortgages, credit cards and overdrafts.

“Ways to ease the burden could include signing up for a 0% balance transfer credit card that clears the debt with no interest applied for a set period, consolidating multiple debts into

a personal loan or seeking free advice from a debt charity on how to restructure debts and negotiate with lenders.” 

Read our articles on the best 0% balance transfer credit cards and best personal loans for more. 

Ruth Emery

Ruth Emery is contributing editor at The Money Edit. Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.