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Interest rates: What the rise means for you

The Bank of England has raised interest rates from 0.5% to 0.75% after much speculation

Expectations of a strengthening economy, solid employment levels, more consumer spending and the potential for wages to rise have all played a part in the decision.

The Bank's main priority is to keep the rising cost of living - known as inflation - under control. It uses its key interest rate, known as the Bank rate or base rate, which is the reference point for how much banks and building societies pay savers and charge borrowers in interest.

Generally, a rise in the Bank rate is good for the UK's 45 million savers and bad for borrowers - but the reality is a bit more nuanced.

Here are the key points:

Five interest rate facts

  • More than 3.5 millionresidential mortgages are on a variable or tracker rate
  • The average standard variable rate mortgage is 4.72%
  • On a £150,000 variable mortgage, a rise to 0.75% is likely to increase the annual cost by £224
  • A Bank rate rise does not guarantee the equivalent increase in interest paid to savers. Half did not move after the last rate rise
  • No easy access savings account at a major High Street bank pays interest of more than 0.5%

Variable-rate mortgages

Across the UK, 9.1 million households have a mortgage. Of these, more than 3.5 million are on a standard variable rate or a tracker rate. These are the people who would be most affected, as their monthly payments would increase.

The relatively small rise will not be particularly painful for the vast majority of householders, although debt charities say that some squeezed families will find this extra burden a real challenge. Those on such variable rates tend to be older, and with relatively small outstanding mortgage balances.

The average outstanding balance is £112,000. For somebody with 20 years left on this mortgage, the monthly bill rise by about £14 a month. For those with a larger balance, then clearly the rise in the mortgage bill will be greater.

Fixed-rate mortgages

The vast majority of new mortgage loans - 96% - are on fixed interest rates, typically for two or five years. Currently half of all outstanding loans are on fixed rates, equating to about 4.7 million households.

Some of these rates are expected to rise after the latest announcement. Of course, none of these borrowers would see an immediate rise. However, when such borrowers reach the end of their term, they may find they have to make higher monthly payments.

That said, they could - depending on when they took out their loan - end up on a cheaper deal. Lenders offering fixed rates tend to be especially competitive.

Other debts

Some rates may rise on other types of borrowing such as personal loans and credit cards. Should they rise, that would have relatively little impact on a credit card interest rate that is generally about 18%.

Source: https://www.bbc.co.uk/news/business-41831777  shared with permission of www.bbc.co.uk