More than 500,000 homeowners face higher mortgage costs as Bank of England rate rise looms

More than half a million UK homeowners could see their mortgage costs rise within days if the Bank of England increases interest rates this week, adding to pressure on households already facing higher borrowing costs.

Economists widely expect the Monetary Policy Committee to raise Bank Rate by a quarter of a percentage point, from 3.75 per cent to 4 per cent, at its meeting tomorrow. Such a move would immediately affect borrowers on tracker mortgages, while potentially prompting lenders to increase rates for customers on standard variable deals.

UK Finance estimates that a quarter-point increase would add about £369 a year in interest to the average tracker mortgage, equivalent to £30.72 a month. There are 510,000 tracker mortgages outstanding, representing about 6 per cent of the UK’s 8.47mn residential mortgages.

Tracker deals move in line with Bank Rate, although lenders determine precisely when changes are reflected in borrowers’ monthly payments. The impact depends on the outstanding loan balance and the terms of each mortgage.

The 87 per cent of borrowers on fixed-rate mortgages would be protected from an immediate increase in payments for the remainder of their existing deals. But that insulation is temporary: about 2.3mn fixed-rate mortgages are due to expire by the end of 2027, according to UK Finance analysis, leaving millions of households needing to refinance in a potentially more expensive market.

A further 470,000 borrowers are on standard variable rates, which lenders set themselves rather than linking directly to the central bank’s benchmark. If banks and building societies passed on a quarter-point increase in full, the average borrower would pay an additional £14.28 a month in interest.

The difference reflects the size of outstanding loans. Tracker borrowers owe an average of £147,468 and currently pay an average interest rate of 4.84 per cent. Their monthly interest bill is about £595, while average monthly repayments covering both capital and interest stand at £966.

Standard variable rate borrowers owe considerably less, at an average of £68,550, but face a higher average interest rate of 6.52 per cent. Their monthly interest averages £373, with capital-and-interest repayments of £662.

The figures illustrate how even a relatively modest change in the central bank’s benchmark can feed through to household finances. A half-point increase would add £61.44 a month in interest to the average tracker balance and £28.56 to the average standard variable rate balance, assuming lenders passed on the full rise.

Conversely, a quarter-point cut would reduce monthly interest by £30.72 for the average tracker borrower and potentially £14.28 for those on standard variable rates.

These estimates measure additional interest on average outstanding balances, rather than the precise change in a borrower’s full monthly repayment. The latter also depends on the remaining mortgage term and whether the loan is being repaid on a capital-and-interest or interest-only basis.

Worked examples from Next Steps Finance show the potential impact on individual repayment mortgages. A borrower with £200,000 outstanding and 25 years remaining would pay about £29 more a month if their tracker rate rose from 4.55 per cent to 4.80 per cent — roughly £344 over a year if the higher rate persisted.

For someone owing £150,000 over the same term, the increase would be £21.48 a month. A borrower with a £300,000 balance would face an increase of almost £43.

Homeowners concerned about meeting repayments are being encouraged to contact their lender, which may have specialist teams able to discuss support options for borrowers in financial difficulty.

The prospect of higher rates also places renewed focus on the refinancing challenge facing fixed-rate customers. While existing deals provide short-term protection from the expected decision, the approaching expiry of millions of mortgages means a much larger group of households could soon be exposed to prevailing market rates.

For borrowers whose current deals were secured when interest rates were lower, the cost of remortgaging may prove more consequential than this week’s quarter-point move.