What the prime rate hike to 4.5% means for your mortgage and your savings (2023)

In the latest move by the Monetary Policy Committee, the Bank of England raised its benchmark interest rate to 4.5% to tackle inflation.

The decision marks the bank's 12th interest rate hike since December 2021, the biggest increase since 1989 - a rise of 4.4 percentage points in 18 months.

The MPC voted by a majority of 7-2 - the two who voted against wanted to keep the rate at 4.25%.

However, this is not surprising. The move follows similar decisions by the European Central Bank and the US Federal Reserve, ending hopes earlier this year that the latest rate hike would be the last in a cycle.

Since December 2021, the Central Bank's Monetary Policy Committee has raised the benchmark interest rate 12 times

But inflation remains higher than expected, forcing the central bank to continue taking steps to try to reduce it.

We explain why the Bank of England is continuing to raise interest rates and what it means for your mortgage, savings and the wider economy.

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Why do interest rates keep rising?

The Bank of England is raising interest rates, officially known as the bank rate but more commonly known as the base rate, in an attempt to curb inflation.

(Video) How interest rate hike will affect mortgages

The MPC sets interest rates to try to keep inflation at the bank's target of 2%, but consumer prices stood at 10.1% in March.

That surprised some experts, who had expected the number to fall into single digits after months above 10%.

Speculations that the increase in March will be the last in the cycle have also ended, and now the debate about when the central bank will start lowering interest rates has continued.

Paul Dales, chief economist at Capital Economics, said the central bank could continue to raise interest rates to 4.75% or even 5% if "domestic inflation proves more resilient than we expect".

According to today's latest forecasts, inflation is expected to fall to around 7% by mid-summer and then to 5.2% by the end of the year.

BoE MPC continues efforts to reduce inflation

The situation was exacerbated by last September's mini-budget, which sent borrowing costs soaring as a list of unfunded tax cuts proposed by then prime minister Liz Truss dampened the market.

Some of the steep rise in mortgage rates has slowed, but they are still much higher than before.

But successive increases in interest rates are good news for savers. Savings accounts now offer some of the highest deposit rates in years. In theory, this encourages people to save more and spend less, thus keeping inflation low by slowing the economy.

But it also means slower overall growth. In addition, some of them have recently been closedBank of AmericaiCredit Suisse i Europashed light on the impact of rapidly rising rates on lenders.

Katrin Löhke, economist at DWS Asset Management, said: “In the UK, both inflation data and wage growth have been much stronger than expected recently – so the challenge of fighting inflation is not yet over.

The UK economy is performing better than expected and could even survive a recession-free winter despite an unprecedented fall in real incomes. The increase in interest rates will only affect the wider economy with a noticeable delay.

"This means the BoE will continue to act in a data-driven manner. Wages and underlying inflation dynamics will continue to be in focus.

Laith Khalaf, head of investment research at AJ Bell, added: “Whether by accident or design, food inflation is at a record high and will be one of the key indicators the Bank of England will look at in its monetary deliberations.

"While the central bank may see the need to raise interest rates to curb rampant inflation, this ironically puts more pressure on household budgets in the short term."

According to the ONS, consumer price index inflation fell to 10.1% in March from 10.4% in February. This brings it back to the level of January

(Video) UK Base Interest Rate at 4.5% -Highest since 2008 (May 2023 increase)

Will interest rates on mortgage loans rise?

Whether or not your mortgage will increase depends on the type of transaction you have. While tracking and floating rates can change as interest rates rise, fixed rates are less certain.

this hereTypical costs of a new fixed rate mortgage loanAlthough the price is not directly linked to the base rate, it has increased in the last 12 months.

According to Moneyfacts, the average two-year fixed mortgage rate is now 5.26% and the five-year fixed rate is 4.97%. Last year at this time, these interest rates on mortgage loans amounted to 3.03 percent and 3.17 percent, respectively.

According to ONS statistics, almost three-fifths of home loans are due to be renewed in 2023 with interest rates below 2%, well below the current rates lenders are offering despite rates falling since the start of the year.

Currently, borrowers who end up with a two-year fixed rate will see their average interest rate rise from 2.57% to 5.26% when they refinance.

If a £200,000 mortgage is paid off over 25 years, a typical borrower's monthly repayments in this scenario would increase by £296, from £904 to £1,200. That equates to paying an extra £3,552 a year on your mortgage.

Are tracker and variable rate mortgages on the rise?

Fixed rate mortgages are the most popular option for UK home owners, with around three quarters of borrowers choosing the product. But around a quarter of UK mortgages are variable transactions.

Variable rate mortgages include tracker rates, "discount rates" and standard variable rates. Monthly repayments for all these types of loans can go up or down.

The tracker tracks the Bank of England base rate plus or minus a set percentage, which is the base rate plus 0.5%.

A lender's standard variable rate is the default rate that people usually turn to if their fixed or other contract expires and they don't refinance into a new contract.

The Bank of England has now raised its key interest rate 12 times in a row, putting pressure on household finances

These can be changed by the lender at any time and usually rise when the base rate rises, but may rise more or less than the Bank of England's measures.

A discount rate is a transaction that follows the bank or housing association's standard variable rate instead of the prime rate. If the SVR changes, these rates will also change.

Mortgage holders on a prime rate tracker product will see their payments rise in line with the Bank of England's increase.

(Video) Will the Bank of Canada hike interest rates again? | Inflation in Canada

Those using a variable discount rate, or already using their lender's standard variable rate, will see their rate change according to what their lender decides.

Some reported it immediately, while others waited to tell the debtor. However, most are likely to see a small increase in interest rates over the next few weeks.

Fixed rate mortgages are expected to stabilize between 4% and 5% over the course of the year

How high will a fixed rate mortgage go?

Fixed mortgage rates are independent of the prime rate, but lenders usually pass on the prime rate increase to customers who buy a new fixed rate.

But while benchmark rates continue to rise, fixed rates have retreated from their October highs, although they now appear to be stabilizing.

The decrease compared to last year is a consequence of the September mini-budget, which led to an increase in interest rates before the increase in the base, so there is room for a decrease in costs.

This time, however, the picture is less certain, as volatility in swaps — the mechanism most lenders use to set fixed interest rates — makes pricing fixed mortgage rates more difficult.

"While the market has already seen a 0.25% rise in base rates, the swaps market has remained volatile over the past few days," said Nicholas Mendes of broker John Charcoal.

These fluctuations affect lenders' rates, with many raising their fixed rates in the past few days.

Expectations of a price war seem to have subsided, at least in the short term.

We expect further growth in lenders as the market fails to sort things out. Virgin and NatWest have also raised rates.

Trying to guess when is the right time to repair and how long to repair will continue to be debated in many families and why now more than ever talking to an agent who can assess your situation can ensure you make the right decision. .

By usingOur best mortgage rate calculator powered by Broker L&C.

The average standard variable rate is now 7.37%, up from 4.78% a year ago, according to Moneyfacts.

For a £200,000 mortgage over a 25-year term, the increase means an extra £317 in mortgage payments a month, or £3,804 a year.

> How will the interest rate increase affect you? Calculator for increasing mortgage loans

(Video) Interest Rates UK Rise to 4.5% Bank of England. DO THIS NOW! MAY 2023 Update

While the interest rate hike is tough on borrowers, it's good news for savers

What does the increase in basic interest rates mean for savings?

Thrift institutions have increased the rates they offer on accounts as the prime rate has risen, though few will raise rates at all.

Since the start of December, the average readily available savings rate has risen by 1.89 percentage points to 2.10%, from 0.21%, according to Moneyfacts.

This is a small increase given the speed with which the Bank of England has raised its base rate. It rose from 3% to 3.5% in December and then from 4% to 4.25% in March.

The average one-year fixed interest rate rose 2.69 percentage points over the past year, from 1.27 to 3.96, according to Moneyfacts.

Anyone paying attention to This is Money's table of the best savings rates will see some improvements.

The most available rate is now 3.71%, compared to 3.00% in January. Meanwhile, the best one-year fixed rate rose to 4.91% from 4.25%.

Will banks increase savings rates?

The best savings accounts at a glance

However, nothing beats inflation this month, so be sure to find the best returns.

Easy access:chip- 3,71 %

One-year fixed interest rate:HTB- 4,91 %

Two-year fixed interest rate:The capital of Dongfeng- 4,90 %

Five-year fixed interest rate:isbank- 4,95 %

Easy access to Cash Isa:Shawbrook- 3,45 %

One Year Fixed Cash Isa:security trust bank- 4,30 %

(Video) What the UK interest rate rise means for you | Do More With Your Money 167


What does interest rate hike mean for savings accounts? ›

Another interest rate hike means savings account holders are likely to earn more money. Getty Images/iStockphoto. The Federal Reserve on Wednesday made official what many economists and experts had already predicted: It's raising its benchmark interest rate to a range between 5% and 5.25%.

What does a 4.5 interest rate mean? ›

The 4.5% annual interest rate translates into a monthly interest rate of 0.375% (4.5% divided by 12). So each month you'll pay 0.375% interest on your outstanding loan balance. When you make your first payment of $1,013, the bank will apply $750 to the loan's interest and $263 to the principal.

How does prime rate increase affect mortgage? ›

Can the prime rate affect your mortgage payments? The higher or lower the prime rate tends to go, the more likely it is that the cost of credit card or adjustable-rate mortgage payments will go up or down as well.

What does interest rate hike mean for buying a house? ›

Therefore, a higher federal funds rate means higher mortgage rates for buyers. This has several effects: You wind up qualifying for a lower loan amount. The amount of a preapproval from lenders is based on both your down payment and the monthly payment you can afford based on your debt-to-income ratio (DTI).

Are rising interest rates good for savings accounts? ›

Escalating interest rates can mean earning more on your savings. To benefit from rising interest rates, open a high-yield savings account, pay down credit card debt, avoid borrowing money and build an emergency fund.

Which bank gives 7% interest on savings account? ›

While 7% with Landmark Credit Union is the highest available interest rate, other high-yield savings accounts exist and may be more worth it based on each bank's unique requirements.

Is 4.5 interest rate good? ›

Generally speaking, if your credit score is 700 or less, 4.5% APR is considered good. In fact, it's close to average for a standard car loan. If your credit score is above 750, you can likely find lower interest rates in the 2% to 3% range. The lower the interest rate, the better it is for you and your wallet.

How much does 1 percentage point save on a mortgage? ›

Each mortgage discount point typically lowers your loan's interest rate by 0.25 percent, so one point would lower a mortgage rate of 4 percent to 3.75 percent for the life of the loan.

How much difference does 1 percent make on a mortgage? ›

How Much Difference Does 1% Make On A Mortgage Rate? The short answer: It can produce thousands or even potentially tens of thousands in savings in any given year, depending on the purchase price of your property, your overall mortgage rate, and the total amount of the mortgage being financed.

Is it good when prime rate increases? ›

If the prime rate rises, the interest rates on your loans and adjustable-rate credit cards will rise as well. Second, the prime rate affects liquidity in the financial markets. When the rate is low, liquidity increases.

What happens to my mortgage if the interest rates go up? ›

Here's what that means for you: As the variable rate rises, more of your mortgage payment goes towards the interest and less to the principal portion of your mortgage balance. Your amortization period may increase, which means it'll take longer to pay off your mortgage balance than originally planned.

Why is it bad for mortgages if interest rates go up? ›

When interest rates go up, mortgages become more expensive as the interest rate on mortgages also goes up. This makes it more costly for consumers to purchase a home. When homes are more expensive, the demand for them decreases.

Will mortgage rates go down 2023? ›

“A fight over raising the debt ceiling is likely to drag into the summer, and mortgage borrowers should expect rate volatility as a result.” Mortgage Bankers Association (MBA). “Long-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.2%.”

Who benefits from higher interest rates? ›

The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.

Is it better to buy a house when interest rates are high? ›

Key Takeaways. Your interest rate becomes more important if you plan to live in your home for more than five years because you'll be paying it for a longer period of time. Buying a home at a lower price but at a higher interest rate can be workable if you can refinance the mortgage in the future to reduce your rate.

How high will savings interest rates go in 2023? ›

With rising federal funds rates comes an increase in savings interest rates. Federal Reserve Board members and Federal Reserve Bank presidents predict the federal funds rate will reach between 3.9% and 4.9% in 2023.

How high will interest rates go in 2023? ›

So far in 2023, the Fed raised rates 0.25 percentage points twice. If they hike rates at the May meeting, it is likely to be another 0.25% jump, meaning interest rates will have increased by 0.75% in 2023, up to 5.25%.

What is a good savings account amount? ›

For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.

Where can I get 5% interest on my savings account? ›

Summary: Best 5% Interest Savings Accounts
Bank/Credit UnionForbes Advisor RatingMinimum Deposit Requirement
Varo Savings Account4.3$0
UFB Premier Savings4.1$0
Salem Five Direct eOne Savings3.8$10
MySavings Direct MySavings Account3.7$0
1 more row
May 2, 2023

Where can I get 6% on my savings? ›

Best 6% interest savings accounts
  • Digital Federal Credit Union (DCU) Primary Savings.
  • Mango Savings™
  • Clearpath Federal Credit Union 12-month CD/IRA.
May 1, 2023

Which bank gives 8% interest on savings account? ›

Synopsis. DCB bank is now providing savings accounts with the highest interest rate of 8%, and FDs with the highest interest rate, 8%, for regular customers and 8.50% for senior citizens. DCB Bank has revised savings accounts and fixed deposit interest rates for deposits below Rs 2 crore.

What interest rate can I get with a 750 credit score? ›

Average mortgage interest rate by credit score
FICO ScoreNational average mortgage APR
660 to 6796.806%
680 to 6996.592%
700 to 7596.415%
760 to 8506.193%
2 more rows
May 1, 2023

What will mortgage rates be in 2024? ›

The average interest rate for the benchmark 30-year fixed mortgage reached 7.08%, as of Monday. However, with the economy expected to cool and possibly dip into a recession, many recent forecasts expect rates to drop to 6% or below in 2024, including a Fannie Mae projection of 5.2%.

Is a 4% mortgage rate high? ›

Currently, a 4% mortgage rate would be considered low. If that question was asked at the beginning of 2022—when 30-year mortgage rates for conforming loans was 3.77%–instead of the end of 2022—when the same mortgage rates were 7.06%—the answer would have been, yes, a 4% mortgage rate is high.

How much income do you need to buy a $650000 house? ›

To determine whether you can afford a $650,000 home you will need to consider the following 4 factors. Based on the current average for a down payment, and the current U.S. average interest rate on a 30-year fixed mortgage you would need to be earning $126,479 per year before taxes to be able to afford a $650,000 home.

How much does a 1% increase add to a mortgage? ›

How will you afford the increase in monthly mortgage payments? If you have a $300,000 mortgage, a one percent increase in interest rates costs you $175 per month more on your mortgage. If your rate goes up two percent, then your mortgage payment is $350 higher.

Is it smart to buy down interest rate? ›

If you are buying a home and have some extra cash to add to your down payment, you can consider buying down the rate. This would lower your payments going forward. This is a particularly good strategy if the seller is willing to pay some closing costs. Often, the process counts points under the seller-paid costs.

How much difference does 5 percent make on a mortgage? ›

How a 1% Difference in Your Mortgage Rate Affects How Much You Pay
Mortgage ratePayment, 20% down30-yr. interest, 20% down
5 more rows
Jan 30, 2023

How to pay off a 30 year mortgage in 10 years? ›

The general rule is that if you double your required payment, you will pay your 30-year fixed rate loan off in less than ten years. A $100,000 mortgage with a 6 percent interest rate requires a payment of $599.55 for 30 years. If you double the payment, the loan is paid off in 109 months, or nine years and one month.

What's the lowest mortgage rate in history? ›

Lowest annual mortgage rate: 2016

While the lowest interest rate for a mortgage in history came in 2020-2021, the lowest annual mortgage rate on record was in 2016, when the typical mortgage was priced at 3.65%.

What is prime rate today 2023? ›

Historical Prime Rate
Effective DateRate
20 more rows

What is current prime rate today? ›

The current Bank of America, N.A. prime rate is 8.25% (rate effective as of May 4, 2023).

What is the new prime rate today? ›

The prime rate is 8.25% today.

How will Fed rate hike affect savings accounts? ›

Savings account rates are loosely linked to the rates the Fed sets. After the central bank raises its rate, financial institutions tend to pay more interest on high-yield savings accounts to stay competitive and attract deposits.

How do interest rate hikes affect savings? ›

When interest rates decline, savings account rates also drop. When interest rates rise, savings account rates are bid up. Generally speaking, central banks and governments support low-interest rate environments. This artificially pushes down the rates earned everywhere else in the economy.

Will rate hikes increase savings rates? ›

"If the Fed hikes interest rates, rates on high-yield savings accounts will go up," says Cathy Curtis, CFP and Founder of Curtis Financial Planning. "So, a person with such an account will earn more on their savings."

How does interest rate affect money on a savings account? ›

When interest rates are low, there isn't a huge difference on smaller balances. However, your earnings can increase over time, especially when the savings account offers a higher interest rate and APY, and you're regularly depositing money into your account.


1. The Bank of Canada is Worried as Mortgage Payments set to Rise 20 40 Percent
(Mark Mitchell - Mortgage Broker London Ontario)
2. How high will UK interest rates go? - May 2023
(Money to the Masses)
3. UK Base Interest Rate at 3% - largest hike in 30 years (November 2022 increase)
(Andy Clever Cash)
4. What does the Fed's rate hike mean for mortgages?
(KMBC 9)
5. Bank of Canada holds interest rate at 4.5%
(CBC News)
6. Bank of Canada holds interest rate steady at 4.5%
(CBC News)


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