Bank and building society bosses are appearing before the Treasury Committee today to explain what they are doing to support customers as the cost of mortgage repayments has jumped to a 15-year high.
The typical two-year fixed mortgage rate availble on the market reached 6.66% today, according to Moneyfactscompare.co.uk, up from 6.63% on Monday. That's the highest since the financial crisis in August 2008.
The average five-year fixed mortgage rate now stands at 6.17%, the highest since last October and up from 6.13% on Monday.
As a result, homeowners whose deals are coming to an end and will soon need to remortgage face paying hundreds of pounds more each month.
Why have interest rates gone up?
On June 22 the Bank of England raised its interest rate by a bigger-than-expected 0.5 percentage points to 5% in an effort to bring down inflation which is currently running at 8.7% and is well beyond the target of 2%.
The bank rate, also known as the "base rate", influences the amount charged by lenders to mortgage and credit card customers. As the base rate goes up, so does the cost of borrowing money, though this should also mean higher returns for holders of savings accounts.
How high will interest rates go?
Forecasts of how much further they might go have been increasing. As of last week financial markets were pricing in base rates of 6.5% by early 2024.
However, economist Allan Monks at JP Morgan has flagged “two metrics to illustrate how a policy rate closer to 7% might be required”. He also cautioned that the economy may have to take a hard landing at some point in the coming year to tame inflation.
Why isn’t my mortgage, loan or savings interest rate the same as the Bank of England's rate?
Banks usually raise their interest rates for both savers and borrowers when the base rate goes up, but to cover their costs they normally pay less to savers than they charge to borrowers. This creates gaps between the rates on savings, loans, and the base rate.
How do higher interest rates help to bring down inflation?
Higher interest rates make it more expensive for people to borrow money and encourages them to save. Overall, this means consumers will tend to spend less.
If people spend less on goods and services overall, the prices of those things tend to rise more slowly. Slower price rises mean a lower rate of inflation.
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