Yesterday, the Bank of England voted once more to raise the base Rate of inflation, taking it to a 14-year high of 3.5%.

While the 0.5 percentage point increase is less than the 0.75 point increase last month, it’s just the latest in a succession of increases which started last December in a bid to get a handle on the UK’s inflation. It’s the Bank’s mandate to keep it under 2%, and it’s currently running at 11.1%.

This 14-year high puts it at the highest since the 2008 financial crisis – when the base rate hit 4.5% in November of that year. The BoE says rates need to go up as workers are in short supply, in turn pushing up wages and driving inflation higher.

The Monetary Policy Committee at the Bank, which makes the decisions, said that this “forceful” response was justified given the current labour market, and they warned that further increases are likely next year.

“The majority of the committee judged that should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank rate might be required for a sustainable return of inflation to target.”

Essentially, by making it more expensive to borrow money – whether that be in the form of mortgages, credit cards, personal loans, or mortgages, – it makes it better for people to save. If they’re not spending, they’re not driving prices up, which in turn brings down inflation.

Chief economic adviser at financial forecaster the EY Item Club, Martin Beck, said that while further increases may be on the horizon, he doesn’t expect the base rate to reach more than 4%. Current predictions put inflation past its peak and recession will ease current labour market pressures.

“In these circumstances, the EY Item Club thinks the need to continue to significantly raise interest rates will soon fade and it is perfectly possible that another increase in the February meeting could be the last one for this cycle,” he said.

So, with that being an overview of why the base rate is going up, the important question is how that rise will affect mortgages.

Around 80% of UK homeowners have a fixed-rate mortgage, which means this month’s additional half-per cent increase won’t affect them directly. Their rate is fixed, as the name suggests.

What this does mean though, is that households looking to remortgage next year will likely see a significant increase in their mortgage payments. A two-year fix in January 2021 might have carried an interest rate of around 3.5%.

Successive increase in the base rate over the last 12 months put the current average for a two-year fix at 75% LTV (loan-to-value) is a lot nearer 5.5%. On a £300,000 property, that could easily be another £200 per month when renewal time comes.

Homeowners with tracker or variable rate mortgages will see the impact of the Bank’s decision much sooner. Tracker mortgages are usually based on the base rate and will increase or decrease accordingly.

Martin Lewis, founder of MoneySavingExpert said that tracker and variable rate mortgages will increase by £25 per month per £100,000 of mortgage.

Simon Gammon, managing partner at Knight Frank Finance, said: “The cost of tracker products will continue to rise and is rapidly approaching parity with fixed-rate products. The best trackers will be in the region of 4%, while the best five-year fixed products are around 4.6%.”

While tracker products may be becoming more expensive at the moment, it may be appropriate for some homeowners to consider switching to a tracker in the short term, while they wait for fixed rates to come back down.

Martin Lewis urged homeowners who are looking to remortgage or buy in the next year to use a mortgage calculator to see how future increases may affect them.

It’s also worth contacting an independent, whole-of-market mortgage broker who will have access to deals not available on the high street or online.

Moneyfacts’ Rachel Springall said: “If borrowers are looking to refinance next year, they may want to start building a savings pot to pay for any associated costs and be conscious that mortgage rates are much higher than they might expect.

“First-time buyers may feel disheartened about their chances of finding an affordable property considering the cost-of-living crisis, but when it comes down to applying for a mortgage, it’s always worth seeking advice to go through the options first, particularly if borrowers have a limited 5% deposit.”

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