£200 More a Month: How the Bank of England's Rate Hike Hits UK Households

A quarter-percentage-point rate increase will cost one Ipswich family roughly £200 a month on their mortgage alone. That's the sharpest single example of what the Bank of England's first rate rise in over three years means for household budgets across the UK.

On Thursday, the central bank raised interest rates as it tries to get a grip on rising inflation linked to the Iran war. Experts say more hikes could follow over the next 18 months, as the conflict continues to push up food, fuel and energy prices in the UK and worldwide.

Higher rates raise borrowing costs. Mortgages, credit cards and personal loans could get more expensive for millions, even as savings rates improve. For families already squeezed by the cost of living, it means pressure from two directions at once.

What does this change for variable-rate borrowers?

About 1.3 million Britons sit on variable rate mortgages that track the Bank of England base rate, plus a lender's margin. Every rise feeds straight into their monthly repayments.

Peter Gill, 48, runs a small tiling business in Halifax and is one of them. Thursday's increase pushes his monthly repayments up by roughly £45, and he's worried they could climb higher. He still thinks switching to a fixed-rate deal would cost him more right now, so he's staying put.

His household pressure goes beyond the mortgage. He and his wife Faye have a combined income of £45,000, and they're paying more for food, gas and electricity. At work, he's paying his staff more after increases in the national minimum wage, while raw material costs have risen due to the war. He's now working "about six and a half days a week" to shield his two children from the worst of it.

"From my point of view, inflation goes up which costs you, then interest rates go up and you have even less money," Peter told the BBC.

What about people on fixed-rate deals?

Most UK mortgage holders are on fixed-rate deals, but that protection runs out when the deal ends. David Hollingworth of brokers L&C Mortgages says many people will be shocked at how much higher fixed-rate deals are than they were five years ago.

"Fixed rates have already risen due to market anticipation that interest rates would need to rise to combat higher inflation," Hollingworth says.

Dawn Fazackerley-King, a Pilates instructor near Ipswich and mother of two, is living that math. She took out a five-year fixed deal at 1.4% in January 2022. Her best refinancing option now, on a two-year fix, is 5.69% — a jump of more than four percentage points that adds about £200 to her monthly costs.

"I don't know where that money is going to come from, it's something we are going to have to figure out as a family. It's stressful," she says.

She and her husband earn about £70,000 jointly and both work full time, so there's no scope to take on extra work. They've already gone through their direct debits and found "no more obvious fat to trim". As she puts it: "We're still living in the same property, our household costs are remaining the same. It's an additional cost of several hundred pounds but we're not getting anything extra for that."

How hard does this hit credit card borrowers?

Credit card borrowing costs also tend to rise when the base rate goes up, though the impact isn't always immediate. Providers can increase the interest they charge with 30 days' notice, which matters most to people carrying outstanding balances.

Ben Thomas, 41, from Shropshire, retrained as a paramedic after leaving accountancy during the Covid pandemic following a mental health crisis. The income drop left him reliant on credit cards and personal loans for everyday expenses, and he's now £52,000 in debt.

He's paused the interest on most of it by agreement, but he's still incurring charges on around £2,000 of credit card debt and expects his repayments to rise. He and his wife pay about £300 a month in debt repayments plus £760 on their mortgage, and they've already struggled with higher food and energy bills.

"With all that's going on, rising interest rates is another cost to deal with," Ben says.

StepChange, the debt charity helping Ben manage his finances, has seen a 20% increase in people asking for support this year. Simon Trevethick, the charity's head of communications, sees worse ahead.

"If higher borrowing costs feed through into household budgets over the coming months, we could see further pressure on people seeking support," he says.

With more hikes possible over the next 18 months, the practical question for households is whether to lock in now or ride the variable rate — and for many, neither option comes cheap.