Bank of England rate rise puts new pressure on UK borrowers

The Bank of England has raised interest rates for the first time in more than three years, and the higher cost of borrowing is starting to reach household budgets, according to BBC News. The central bank made the quarter-percentage point increase on Thursday as it tries to contain inflation linked to the Iran war.

The conflict continues to push up the price of food, fuel and energy in the UK and abroad. Experts quoted in the report expect further increases over the next 18 months. Savers may earn better returns, but people who borrow money face higher repayments.

Who feels it first

The fastest impact falls on the roughly 1.3 million Britons with variable rate mortgages. These loans follow the Bank's base rate, with a margin added by the lender, so monthly payments go up soon after any rate rise.

Most mortgage holders have fixed-rate deals, but that protection lasts only until the deal ends. Lenders had already raised fixed rates because markets expected the Bank to act against inflation. David Hollingworth of the broker L&C Mortgages said many borrowers will be shocked by how much more fixed deals cost than they did five years ago. Households coming off cheap long-term fixes could see their monthly payments rise sharply.

Credit card costs usually follow the base rate too, though often with a delay. Card providers can raise the interest they charge on balances that are still owed after giving 30 days' notice.

Signs of strain

Many households are taking on higher borrowing costs while already paying more for food and energy. The debt charity StepChange said requests for help have risen by 20% this year. It warned that more people could need support if higher borrowing costs reach family budgets in the coming months.

Small business owners are affected in several ways at once. Some face higher wage bills and higher prices for raw materials, and also pay more on their own mortgages and loans.

What it means for business

Firms that rely on credit, and households that buy from local businesses, are likely to be more careful with spending while rates rise. Businesses may want to check the terms of their loans and card facilities, plan for further increases, and expect customers to be more sensitive to price changes.