MILLIONS of people with a mortgage, loan or credit card are under pressure could as the Bank of England has today increased interest rates for the first time in more than three years.

There are fears over a cost of living crisis as the base rate of interest is now 0.25% – up from a record low of 0.1%.

It is the first time the Bank has upped interest rates since August 2018 – after slashing rates to a record low in March 2020 at the outbreak of the Covid pandemic.

It voted by a majority of 8-1 to increase rates to 0.25%.

The rise had been expected and there had been hints it was coming in recent weeks – particularly as inflation this week hit its highest level in a decade.

The move by the Bank will heap misery on many households who are already struggling with the soaring cost of living and rising inflation, which this week clocked in at 5.1%.

Many experts had predicted the recent spike in Covid cases would delay the decision.

Susannah Streeter, senior markets analyst at Hargreaves Lansdown, said the Bank of England "clearly sees rampant inflation as an even more treacherous tide to deal with" than the rise in Omicron cases.

The Bank had not expected inflation to reach 5% until the Spring, but it is already above that level and predicted to hit 6% by April.

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Streeter said: "All eyes are now on when the next rate rise could come in the UK.

"The indications are that fresh hikes will arrive in relatively quick succession, but only when the latest Covid storm starts to subside."

Still this first hike will affect millions of households, with many set to see monthly repayments on their debt increase as a result. 

Some 2.2 million Brits are on a variable rate mortgage and 850,000 households are on a tracker mortgage.

That means 3 million people are about to see their monthly repayments go up.

Anyone about to take out a new loan or credit card will pay more than if they had secured a deal just a few days ago. 

A number of banks had even started increasing their mortgages rates weeks ago in anticipation of a rise.

What does a rate rise mean for my finances and how can I protect myself? 

Rate rises are bad for anyone with debt – particularly if you’re not locked into a fixed rate.

Here's how the rate rise could affect your finances, and what to do about it:

Mortgages

If you have a fixed mortgage deal or a loan, you won’t be affected immediately because you’re locked in to a certain rate. 

However, when you come to remortgage or take out a new loan, you will notice that rates have gone up and it is more expensive. 

Homeowners should check their mortgage rate and consider switching to a cheap deal while they're still available.

If 0.5 percentage points is added to mortgage interest it adds about £50 a month to the cost of a £200,000, 25-year mortgage, or around £120 a month extra to a £450,000, 25-year mortgage.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: "Borrowers sitting on their standard variable rate (SVR) may see their rate rise within a month.

"A rise of 0.15% on the current average SVR of 4.4% would add around £408 on to monthly repayments over two years."

Savings

Rate rises should, however, be good for savers who have been struggling to get a decent return on their money for years.

Banks aren’t quite as quick to pass on rate rises but you should notice rates on savings accounts and Isas edge up over the coming weeks. 

The effects of this aren’t huge and you’ll still struggle to beat inflation, but every little helps.

If you had £1,000 in a savings account earning 0.1% of interest, you would earn just £1 in a year in interest.

If that goes up to 0.25%, you’ll earn £2.50 a year in interest.

Sarah Pennells, consumer finance specialist at Royal London, said: "Despite today's rise in base rate, interest rates paid on savings are likely to remain historically low.

"With some savings accounts currently paying virtually no interest, today's rate rise may be a good reminder to look at what else is available and think about longer-term investing."

Loans and credit cards

If you have credit card debt, shifting your debt onto a 0% balance transfer card is a great way to avoid interest and pay off what you owe more quickly.

Overdraft rates on your bank account may also creep up if the base rate rises, but experts say it won't happen overnight.

If your credit card provider raises its rates, you can reject it and close the account. You should be given 60 days to pay off what you owe.

Shopping around on your other bills can help save money, even if they're not directly affected by interest rate rises.

MoneySavingExpert's Martin Lewis says you can save £500 on your car insurance by switching to a better deal, for example.

Why have interest rates gone up?

The Bank of England has to balance keeping borrowing cheap enough to ensure businesses and individual can borrow money if they need to, but not so cheap that they borrow excessively, which pushes inflation up.

Inflation rising is a major concern at the moment because it forces up the cost of everything from energy bills to the price of the food shop.

Households are already having to grapple with soaring bills and record high petrol prices.

It is estimated that inflation could add £180 a year to average family food bill.

And could hit families to the tune of £1,800 by the end of the year.

The Bank of England meets every month to decide on interest rates.

But it’s important to keep the rate rise in context – interest rates are still incredibly low.

Before the financial crisis in 2007, for example, interest rates were 5.75%. 

And older generations may remember the 90s, when rates were a whopping 14%. 

So, while loans and mortgages may not be as cheap as they were, there are still plenty of decent deals still out there. 

Did we know rates were going up?

We suspected it and there have been numerous hints in recent weeks. 

However, the recent spike in Omicron case had meant many people expected the Bank of England to hold off raising rates until its next meeting in the new year.

For example, in the Autumn Budget, Chancellor Rishi Sunak said he had recently written to the Bank to remind it of its remit to keep inflation at 2%.

Currently, inflation is tracking at 5.1% – its highest level in a decade.

Typically a rate rise can help reduce inflation because it stops people spending and borrowing as much.

The Bank of England is in charge of setting interest rates and sets them based on what is best for the UK economy and what will help it meet its inflation target of 2 per cent.

Interest rates were slashed from 0.75% to 0.1% in March 2020 in response to the outbreak of the Covid pandemic.

It was hoped that cutting rates would help shore up the economy, allowing banks to lend more money to support individuals and businesses across the country.

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