Bank of England raises interest rates for first time in three years: What the hike to 4% means for your mortgage and savings

The Bank of England has increased interest rates for the first time in more than three years, raising the base rate to 4 per cent. The Monetary Policy Committee (MPC) voted by a majority of eight to one to increase the base rate by 0.25 percentage points, with one member voting to hike it by 0.5 percentage points, to 4.25 per cent. It marks a cautionary shift by the bank's economists who had held rates at 3.75 per cent for the previous six meetings, since December 2025. Rates had been expected to fall this year but worries of an inflation spike and a potential energy price shock due to the conflict in Iran have led the Bank to change tack.And they could now rise higher still. Investors are betting that rates will jump to 4.75 per cent or even 5 per cent by November next year.Why did the Bank of England raise rates? Higher interest rates encourage households to rein in spending and squirrel cash away because they will get better returns on their savings. This in theory reduces inflation – increases in the cost of goods and services.Inflation rose 3.5 per cent in the 12 months to September, according to the latest figures from the Office for National Statistics, well above the Bank of England's 2 per cent annual inflation rate target.The inflation rate peaked at 11.1 per cent in 2022 and has broadly fallen since then. On the rise: The Bank of England has increased the base rate of interest to 4% today However, since reaching a recent low of 2.6 per cent in June this year, the rate has started to creep up again in recent months thanks to higher oil, diesel and petrol prices linked to the Middle East conflict. This has driven up the price of household bills and food, as well as the cost of many services. By raising the base rate the bank hopes households will spend a bit less and inflation will reduce. However, it also needs to balance the need to ward off inflation with the risk of slow economic growth and unemployment, which can be a result of keeping rates high.What does this mean for mortgage borrowers? A rise in the base rate often leads to a rise in interest rates on fixed mortgages, as banks pass on increases in their own borrowing costs to their customers. However, today's base rate rise was widely anticipated, and lenders have already re-priced deals upwards to reflect it. Therefore, mortgage experts say it is unlikely that today's increase will cause a substantial rise. Three major high street lenders cut mortgage rates this week, reversing some of their hikes over the last two months.The average five-year fixed rate is 5.99 per cent, according to Moneyfacts. However, those with at least 40 per cent equity in their home can now get close to 5 per cent. David Hollingworth, associate director at L&C Mortgages, says: 'The increase in fixed rates has already been severe with a typical hike of around 1 per cent this year.'That's come in anticipation of rate rises so any increase may have little to no impact on current deals.' What about those on tracker rates? Those on tracker mortgages will see their rates rise in line with the base rate increase, and those on a standard variable rate are also likely to see lenders pass on the rate rises.Despite the growing anticipation of rate hikes there’s been more interest in tracker mortgage deals recently. They now account for around a quarter of mortgage applications, according to some brokers and lenders.'Tracker borrowers will feel the base rate rise as it feeds into their mortgage rate, which is directly pegged to the Bank of England rate,' says David Hollingworth, associate director at L&C Mortgages.'A borrower with a £200,000 mortgage with a 25 year term lifting from 4.15 per cent to 4.40 per cent would see payments increase by £28 a month.'However, that could still be cheaper than a fixed deal for some. Trackers also often come with no early repayment charges so there is no penalty to switch away. Nicholas Mendes, mortgage technical manager at broker John Charcol says: 'Trackers can be cheaper than fixed rates today and often come without early repayment charges, but they suit borrowers with room in their budget to absorb higher payments.'What to do if you need to remortgageAt a time when rates are elevated, households will want to ensure they're on the best mortgage deal possible.If they need to remortgage soon, that means speaking to a broker or lender and locking in a new rate as soon as they can.It is often possible to reserve a new mortgage rate as early as six months before the current one ends.Someone with a mortgage deal ending as far away as May next year should try to lock in a rate now.If the situation changes and rates begin to fall again, it is normally possible to abandon it in favour of a new one until just before the new mortgage begins. future decisions on base rate should not be the starting point for choosing a mortgage.Mendes says: 'Securing a rate early protects against any rise in the coming months, and if fixed rates continue to improve before completion, many lenders allow a switch to a cheaper product.'No one can say with certainty where base rate will be next year, so the right mortgage is one that remains affordable whichever way rates move.' Tough decision: Bank of England governor Andrew Bailey and fellow rate-setters are tasked with keeping inflation in check What does this mean for your savings?With the base rate increased to 4 per cent, savers should expect variable savings such as easy-access rates to rise slightly.However, there are already many accounts that can beat the 4 per cent Bank of England base rate and the 3.6 per cent rate of inflation. If an account pays less than the inflation rate, it means your money is losing value in real terms and you should strongly consider switching to a new account or provider. You can find the best easy-access savings rates using This is Money's savings rate tables, which are updated daily.There are currently 30 deals paying 4 per cent or more. For example, Oxbury Bank is paying 4.57 per cent to new customers who open an easy-access account with it.Someone putting £10,000 in this account could expect to earn around £457 in interest after a year, if the rate remains the same.It comes with full protection under the Financial Services Compensation Scheme (FSCS) up to £120,000 per person.It's worth noting the majority of easy access accounts pay less than the base rate. The average easy-access savings rate of 2.58 per cent is also below the 3.5 per cent rate of inflation.If you are able to lock your money away for six months or more, you could also consider a fixed rate savings account.Rates on these are also likely to rise following today's decision, but banks will also consider where the base rate might be going in future. Should you take a fixed rate savings deal?While the best easy-access savings accounts with no restrictions pay around 4.5 per cent, it's possible to do better with a fixed-rate deal.Fixed rates mean you guarantee the rate for the period of the fix, which can be beneficial if rates fall – but there are penalties for taking out cash early.You can find the top fixed-rate savings accounts using This is Money's independent best-buy tables.The best one-year deal is offered by Al Rayan Bank and pays 5.18 per cent.A saver putting £10,000 in this account will earn a guaranteed £518 return over one year. It comes with full protection under the FSCS up to £120,000 per person.Oaknorth Bank is also offering 5.16 per cent. Again it offers FSCS protection. The best two-year fixed rate is being offered by RCI Bank and is paying 5.3 per cent.Make sure you use your Isa allowanceAs well as keeping a close eye on their savings rate, savers should consider using a cash Isa if they are not already to protect the interest they earn from being taxed.The annual tax-free allowance is currently £20,000. This has been set to fall to £12,000 for most savers, but Chancellor John Healey reversed the decision in the Budget last week. Rates on Isas are even better than some easy access accounts. However, the top deals have limited-time bonus rates after which time the rate falls.The best one on the market is with Trading 212 which pays 4.77 per cent.You can find the leading cash Isa rates using This is Money's best-buy cash Isa tables. The best fixed-rate cash Isa rates range from 5 per cent for one-year fixes to 5.27 per cent for five-year fixes.How to find a new mortgage Mortgage rates have jumped as conflict with Iran has driven up inflation expectations and dashed hopes of interest rate cuts.If you need a mortgage because you are buying a home, or your current fixed rate deal is due to end, you should explore your options as soon as possible. This is Money has a long-standing partnership with fee-free broker L&C, to provide you with expert mortgage advice.Use This is Money and L&Cs best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.Or use L&C’s online Mortgage Finder to search thousands of deals from more than 90 different lenders to discover the best deal for you.Mortgage service provided by London & Country Mortgages (L&C), which is authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage