Bank rate rise pours more misery on cost of living struggle

Laura Suter
5 May 2022

•    Rate rise means a 10-fold increase in Base Rate since December
•    Interest rates at the highest level for 13 years – March 2009 the last time we saw 1%
•    Someone with £400,000 variable rate mortgage will pay £612 a year more
•    Mortgage rates have risen, but you can still save £100s by switching
•    Savers finally getting higher rates – just as many cash-in to pay for cost of living rise
•    Beware the fix: BoE predicts rates will hit 2.5% – anyone who fixes savings rate will miss out

Laura Suter, head of personal finance at AJ Bell, comments: 

“The Bank of England has hiked rates to its highest level for 13 years, taking it up to 1%. The last time we had rates this high was in March 2009, when the Bank was rapidly slashing rates as the Global Financial Crisis took hold – a very different environment to today.

“The move by the Bank’s ratesetters to increase rates lumps even more pain on households struggling with the cost of living crisis. With inflation at 7% and expected to hit double digits in October, when the energy price cap rises again, it might have seemed like the Bank’s hand was forced. The global nature of the drivers of inflation means that this increase to 1% is very unlikely to beat inflation into a hasty retreat, but what it is certain to do is pile more misery on people already having to rely on debt just to pay their bills. 

“Last time rates were at 1% they only sat there for less than a month, before being cut again to 0.5%. Anyone with borrowing will fear that the same will be true this time around, and that the Bank will increase rates again to 1.25% at the next meeting in June. That seems almost inevitable, with the Bank now predicting that rates will hit around 2.5% by this time next year.

“This fourth increase in a row by the bank means that in the space of less than five months we’ve seen rates leap from 0.1% to 1%. And that means anyone with debt has seen a significant increase in their costs.” 


“We’ve already seen the top easy-access savings account rates rise, which has been welcome news for savers wanting to boost their cash returns. Clearly the timing of rates rising just as the nation is having to dip into their lockdown savings in a big way to pay for the cost of living crisis means many won’t benefit from the increases. 

“The entrance of US banking giant Chase to the market propelled rates higher, and means that anyone currently earning less than 1.5% on their savings should switch accounts to get a better rate. However, anyone thinking of fixing their savings rate needs to proceed with caution. The top two-year fixed rate account is currently paying 2.5%*, which is significantly more than the top easy-access account of 1.5%. But both those rates could rise after today’s Base Rate rise – and if you’ve already locked in for two years you’ll miss out on any increases.

“If you have £10,000 saved and put it in the top two-year fix now you’d have made £506 interest at the end of the two years, but if you wait and savings rate rise by 0.25 percentage points, you’d make an extra £51 in interest over that two years. If Base Rate rises by another 0.25 percentage points at the next Bank of England meeting, to reach 1.25%, and all that gets passed on to savings rates you’d make an extra £103 in interest at the end of the two years compared to fixing now.

“Average savings rates haven’t increased since the Bank starting hiking rates last year, but that’s because of the huge number of accounts that are paying no interest or just paying 0.01%. Far too much of savers’ money is sitting in old accounts earning nothing. Unfortunately today’s increase won’t help, as the majority of accounts will not pass on the rate increase. But for a few minutes work savers can now make a significant amount of money by switching. 

“Someone with £10,000 of savings, which is currently earning 0.01% interest, could make £149 by switching to the top rate easy-access account – not bad for 10 minutes work. And if someone had £30,000 of savings they’d be rewarded with £447 of extra interest for that few minutes of work to switch accounts.”

*Based on figures from Moneyfacts, accurate to 03/05/22


“Anyone with a fixed-rate mortgage can pat themselves on the back as they will be protected from today’s increase – at least until the next time they have to remortgage. However, those with variable rate deals or tracker mortgages will see their costs increase as a result of the rise. Today’s increase in the base rate, from 0.75% to 1%, will add £32 a month, or £384 a year, onto the mortgage costs of someone with a £250,000 tracker mortgage*. But for someone with £400,000 of borrowing it will mean an extra £51 a month, or £612 a year.

“Over the past five months the collective impact of the rate increases has represented a big hit to mortgage holders’ bills. The collective impact of the ten-fold increase in the Base Rate from 0.1% in December to 1% today will have meant a £2,232 a year increase in mortgage costs for someone with £400,000 of borrowing, or a £1,392 a year increase for someone with a £250,000 mortgage. 

“The Bank now expects rates to rise to 2.5% by next year, which will lump more costs on mortgage holders. Including today’s increase, that would add an extra £4,452 a year onto the mortgage costs of someone with a £400,000 mortgage, or £2,784 a year onto the mortgage bill of someone with £250,000 of borrowing.

“Anyone on a variable rate deal can still benefit from fixing their mortgage now, albeit at higher rates than if they had fixed last year. We’ve seen mortgage rates leap up with the average two-year fix standing at 2.11% today compared to a record low of 1.2% in September last year, according to Bank of England data.

“Even though rates have risen, a homeowner with a £250,000 mortgage could save £53 a month, or £636 a year, by moving their variable rate mortgage to the current top two-year fixed rate deal**. At £400,000 of borrowing that cost saving rises to £1,008 a year, or £84 a month.”

*All mortgage figures assume a repayment mortgage on a 25-year term and the current standard variable rate of 2.44%, which is based on Bank of England figures.
** Assumes a repayment mortgage with a 25-year term, at the current average variable rate of 2.44%, based on BoE figures, and that the entire of today’s 0.25 percentage point hike is passed on, compared to switching to the top two-year fix of 2.27% from Natwest, on 80% loan-to-value. Rate was still available at time of release.

People in debt:

“The cost of living crisis has already pushed people to take on more debt and today’s rate increase will be very unwelcome news for those people. So far the average interest rates charged on debt haven’t risen dramatically as a result of the successive Base Rate increases, but instead have started creeping upwards. 

“Anyone with a decent credit rating should look to move their debt to a cheaper rate or to a 0% deal. There are still plenty of 0% balance transfer credit card deals available, as well as 0% purchase deals, meaning that people can cut the cost of their debt if they are paying high rates.

“However, the best deals are only available to those with good credit ratings and those who have poorer scores may find themselves trapped on higher cost debt. Regardless, they should look around to see if they can access cheaper rates or speak to an expert, such as Citizens Advice or a debt charity, to see what help is available.”

Laura Suter
Head of Personal Finance

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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