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Bank of England increases interest rates to 5.25%: what does this mean for your money?

Updated 21 September 2023

3min read

Lisa-Marie Voneshen

The Bank of England (BoE) has raised the base rate by 0.25 percentage points to 5.25% today (3 August), the fourteenth time it has increased since December 2021.

The BoE is using rates to try and tackle eye-watering inflation, which is having a huge impact on our finances. It is expected to drop from 7.9% to 5% by the end of 2023.

High inflation isn’t only an issue in the UK. In the US, the Federal Reserve recently hiked interest rates to its highest level in 22 years.

Now, we’ll explore what the latest interest rate rise in the UK means for you and your money.

How will the latest rise affect my mortgage?

Unfortunately, the latest rate rise will make your mortgage more expensive, but when these monthly payments increase depends on your mortgage type.

If you have a variable rate mortgage, like a tracker, your rate will likely rise immediately, while standard variable rates (SVR) typically also increase following a base rate rise.

Two-year fixed-rate mortgages have recently hit a 15-year high due to inflation and uncertainty over the direction of interest rates.

As the base rate is expected to reach 5.75% by the end of the year, down from over 6%, an expected fall in mortgage rates is slowly kicking in.

If your fixed-rate deal expires soon, you’ll still pay more when you remortgage, but rates will likely be lower than earlier this year.

“Fixed mortgage rates are based on market forecasts of future interest rates, and so they can fall even while the main bank rate is still going up,” said Laith Khalaf, head of investment analysis at AJ Bell.

Elsewhere, UK house prices have fallen 3.8% in July, the fastest annual rate for 14 years, according to Nationwide.

If you want to get on the housing ladder or remortgage, it’s wise to seek expert financial advice. Click below to find a regulated mortgage broker.

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Will the latest rise affect my savings?

Savers have benefitted from rising interest rates, with the top fixed-rate account now offering around 6% if you lock your money away for a year. However, this is still below inflation.

Savings rates are unlikely to rise much further due to a fall in the base rate peak this year, so top accounts may soon be pulled from the market.

Now is a good time to fix if you can, so you can take advantage of these generous rates.

“Anyone who has been waiting on the sidelines before they pounce and lock in a fixed rate savings deal might want to get their skates on,” said Laura Suter, head of personal finance at AJ Bell.

“In the next couple of weeks, we’ll see a rush of savers moving to lock in rates before they are cut further.”

It’s worth shopping around for the best savings account. If you plan on putting your money into a fixed-rate account, make sure you won’t need to access your cash before the term ends.

If you’re hoping to beat inflation and have a long-term financial goal you want to achieve, it’s worth considering investing in stocks and shares. While the value of your investments can rise and fall, you can hopefully ride out any volatility by investing for at least a few years.

Not sure how to invest or grow your savings? A financial adviser can look at your personal circumstances and goals to help recommend the right course of action for you.

Have interest rates peaked?

Many experts have suggested that interest rates will now peak at 5.75% at the end of this year, down from over 6%.

The market is currently pricing in one or two more base rate hikes, but this may change if inflation is stickier than expected.

If you’re feeling uncertain about your finances or facing a life-changing decision, it’s worth seeking advice from an independent financial adviser regulated by the Financial Conduct Authority (FCA).

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About the author
Lisa-Marie Voneshen is a Senior Content Writer at Unbiased. She is an award-winning journalist with nearly a decade of experience writing and editing content across various areas, including personal finance and investing.