The Bank of England has increased interest rates for the first time in more than three years, raising the base rate to 4 per cent.
The Monetary Policy Committee (MPC) voted by a majority of eight to one to increase the base rate by 0.25 percentage points, with one member voting to hike it by 0.5 percentage points, to 4.25 per cent.
It marks a cautionary shift by the bank’s economists who had held rates at 3.75 per cent for the previous six meetings, since December 2025.
Rates had been expected to fall this year but worries of an inflation spike and a potential energy price shock due to the conflict in Iran have led the Bank to change tack.
And they could now rise higher still. Investors are betting that rates will jump to 4.75 per cent or even 5 per cent by November next year.
Why did the Bank of England raise rates?
Higher interest rates encourage households to rein in spending and put money away because they will get better returns on their savings.
This in theory reduces inflation – increases in the cost of goods and services.
Inflation rose 3.5 per cent in the 12 months to September, according to the latest figures from the Office for National Statistics, well above the Bank of England’s 2 per cent annual inflation rate target.
The inflation rate peaked at 11.1 per cent in 2022 and has broadly fallen since then.
However, since reaching a recent low of 2.6 per cent in June this year, the rate has started to creep up again in recent months due to higher oil, diesel and petrol prices linked to the conflict in the Middle East.
This has driven up the price of household bills and food, as well as the cost of many services.
By raising the base rate the bank hopes households will spend less and inflation will reduce.
However, it also needs to balance the need to ward off inflation with the risk of slow economic growth and unemployment, which can be a result of keeping rates high.
What does this mean for mortgage borrowers?
A rise in the base rate often leads to a rise in interest rates on fixed mortgages, as banks pass on increases in their own borrowing costs to their customers.
However, today’s base rate rise was widely anticipated, and lenders have already re-priced deals upwards to reflect it.
Therefore, mortgage experts say it is unlikely that today’s increase will cause a substantial rise.
Three major high street lenders cut mortgage rates this week, reversing some of their hikes over the last two months.
The average five-year fixed rate is 5.99 per cent, according to Moneyfacts. However, those with at least 40 per cent equity in their home can now get close to 5 per cent.
David Hollingworth, associate director at L&C Mortgages, says: ‘The increase in fixed rates has already been severe with a typical hike of around 1 per cent this year.
‘That’s come in anticipation of rate rises so any increase may have little to no impact on current deals.’
What about those on tracker rates?
Homeowners with tracker mortgages will see their rates rise in line with the base rate increase, and those on a standard variable rate are also likely to see lenders pass on the rate rises.
Despite the growing anticipation of rate hikes there’s been more interest in tracker mortgage deals recently.
They now account for around a quarter of mortgage applications, according to some brokers and lenders.
David Hollingworth, associate director at L&C Mortgages, said: ‘Tracker borrowers will feel the base rate rise as it feeds into their mortgage rate, which is directly pegged to the Bank of England rate.
‘A borrower with a £200,000 mortgage with a 25 year term lifting from 4.15 per cent to 4.40 per cent would see payments increase by £28 a month.’
However, that could still be cheaper than a fixed deal for some. Trackers also often come with no early repayment charges so there is no penalty to switch away.
Nicholas Mendes, mortgage technical manager at broker John Charcol, says: ‘Trackers can be cheaper than fixed rates today and often come without early repayment charges, but they suit borrowers with room in their budget to absorb higher payments.’
What to do if you need to remortgage
At a time when rates are elevated, households will want to ensure they’re on the best mortgage deal possible.
If they need to remortgage soon, that means speaking to a broker or lender and locking in a new rate as soon as they can.
It is often possible to reserve a new mortgage rate as early as six months before the current one ends.
Someone with a mortgage deal ending as far away as May next year should try to lock in a rate now.
If the situation changes and rates begin to fall again, it is normally possible to abandon it in favour of a new one until just before the new mortgage begins.
future decisions on base rate should not be the starting point for choosing a mortgage.
Mendes says: ‘Securing a rate early protects against any rise in the coming months, and if fixed rates continue to improve before completion, many lenders allow a switch to a cheaper product.
‘No one can say with certainty where base rate will be next year, so the right mortgage is one that remains affordable whichever way rates move.’
