The Bank of England has increased interest rates by 0.5% to 5% as it continues to battle high inflation.
It was the 13th consecutive meeting at which the Monetary Policy Committee (MPC) has hiked the official cost of borrowing, with the Bank Rate now standing at a new 15-year high.
The latest increase adds a further £60 a month to repayments for homeowners with a £200,000 variable mortgage.
People with variable rate mortgages have now seen their mortgage costs jump by £566 a month since the MPC first started to raise interest rates from their record low of 0.1% in December 2021.
Why is this happening?
The MPC has been increasing interest rates since the end of 2021 in a bid to bring inflation back down to its 2% target.
But the most recent figures showed that core inflation, which excludes volatile categories such as food and energy, increased to 7.1% during May, while headline Consumer Prices Inflation stalled at 8.7%, after edging down the previous month.
The figures suggest inflation in the UK has now become entrenched and is being driven by internal factors, such as wage increases, rather than external factors, such as the conflict in Ukraine.
As a result, it will be harder to bring down and interest rates are expected to have to rise further than previously thought, with economists now predicting they could peak at 6%.
But there was some good news, with the MPC continuing to say it expects inflation to “fall significantly further” during the rest of the year, and markets expecting it to begin cutting interest rates by the middle of 2024.
While today’s higher than expected interest rate rise may have come as a shock, it is important to remember that if the Bank Rate does peak at 6%, this is only slightly higher than the 5.5% to 5.75% markets had previously pencilled in.
What does this mean for mortgages?
For those on variable rate mortgages, such as tracker deals and standard variable rates (SVR), today’s increase will mean their mortgage rate will also rise by 0.25%.
People on fixed rate deals will be protected from the latest hike until they come to remortgage, as fixed rates remain the same for the entire product term.
The mortgage market has already been responding to higher than expected inflation, with lenders withdrawing nearly 400 products for repricing during the past month.
This recent large-scale repricing means much of the bad news has already been factored in, with rates edging up only slightly more today, to stand at 6.19% for two-year fixed rate mortgages 5.81% for five-year ones.
Even so, people coming to the end of fixed rate deals are likely to face significant payment shock when they come to remortgage.
Rates averaged 2.59% and 2.92% when people coming to the end of two-year and five-year deals respectively took out their loan.