Bank of England increases interest rate to 2.25%

The Bank of England has increased interest rates in the UK by 0.5 percentage points, to 2.25% – that’s the highest level for 14 years.

The move has been made in a bid to tackle soaring prices and the rates are now at their highest since 2008 when the global financial crisis was at its height.

Financial analysts had predicted that rates could have risen by three-quarters of a percentage point.

The bank’s monetary policy committee was split over the decision with five members voting to raise the rate, while three members preferred to increase the rate by 0.75 percentage points to 2.5%.

One member preferred to increase the rate by 0.25 percentage points to 2%.

Seventh month in a row that interest rates have increased

This is now the seventh month in a row that interest rates have been raised by the Bank of England.

With inflation at its highest in nearly 40 years, it is currently at 9.9% – which is higher than the bank’s target of 2%.

Analysts are also predicting that inflation will continue to rise in October – despite government interventions aimed at limiting the impact of electricity and gas price rises on households.

Mark Harris, of mortgage broker SPF Private Clients, said: “While a 50-basis points rate rise does not feel as aggressive as the 75 basis points that was mooted in some quarters, it still means a considerable increase in monthly payments for those on variable-rate mortgages and comes on the back of six interest rate rises since December.

“It means a borrower with a £300,000 variable-rate mortgage will have to find an extra £1,500 a year.

“With the energy price cap due to rise again at the beginning of October, some households will really struggle.”

‘Equates to an annual loss of £21,500 of cashflow’

Mark Alexander, the founder of Property118.com, said: “Since the beginning of this year, the Bank of England has increased base rates from 0.1% to 2.25%. This equates to an annual loss of £21,500 of cashflow on every £1,000,000 landlords have borrowed.

“To make things worse, this additional expense can no longer be offset against rental income. Instead, an additional tax credit of just £4,300 (20% of the increased finance cost) is applied, based on the same example.”

He added: “Some landlords will not have felt the pinch quite yet because their mortgage interest rates will be fixed.

“However, when those fixed rates expire they will find themselves in a new world of pain.”

‘Mortgage market has seen relentless rate rises this year’

Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “The mortgage market has seen relentless rate rises this year, and borrowers coming off a fixed mortgage will find the cost to secure a new deal is much higher than they were perhaps anticipating.

“This could not come at a worse time amid a cost-of-living crisis when household budgets are stretched.

“However, failing to fix and falling onto a standard variable rate (SVR) is unwise, as the average rate has risen to its highest level in over a decade.”

‘Impact of the interest rate rise will be felt’

Jeremy Leaf, a north London estate agent and a former RICS residential chairman, said: “From our experience on the ground, the impact of the interest rate rise will be felt most with regard to confidence to move and take on debt.

“The increase will impact first-time buyers and new borrowers particularly, bearing in mind approximately 80% of borrowers are on fixed rates.

“However, with UK Finance forecasting that 1.8m deals are due to end at some point next year, there will be plenty of borrowers looking for new mortgage deals at a time when rates are likely to be considerably higher.”

‘Property market is slowly showing signs of calming down’

Tomer Aboody, a director of property lender MT Finance, said: “With the trend in rising interest rates continuing, the property market is slowly showing signs of calming down from the frenzy of the past couple of years.

“With property values at record highs, a continuous upward curve in pricing isn’t sustainable or helpful and the return of more realism is long overdue.

“However, with fewer buyers but also far fewer sellers, we are still seeing activity in the housing market, especially when it comes to prime assets.”

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