The Bank of England confirmed that it was raising interest rates from 1.25 per cent to 1.75 per cent in an announcement today. 

The increase of 0.5 per cent points takes interest rates to the highest level since December 2008, which is expected to take its toll on homeowners and also first-time buyers. 

Buying a house is already a challenge with the house price of an average first-time buyer reaching a record £224,943 this year. However, the interest rate hike is expected to take first-time buyers’ monthly mortgage repayments to a high not seen since 2012. 

According to research by Rightmove (opens in new tab), the rate rise of 0.5 per cent will take the average monthly mortgage payment from £976, to £1,030. Prior to the August hike, this repayment amounted to 38 per cent of a first-buyers monthly salary, this will now rise to 40 per cent.

exterior of red brick house with pathway and bay window

(Image credit: Future PLC / David Giles)

‘Today’s 0.5% increase in the base rate takes average monthly mortgage payments for new first time-buyers to over £1000 if lenders pass on the rate rise to new applicants,’ explains Tim Bannister, Rightmove’s Housing Expert. ‘This is approximately 40% of the average first-time buyer salary, a level not seen since 2012.’

‘First-time buyers trying to get onto the ladder are currently facing average monthly mortgage payments that are 20% higher than the start of the year due to rising interest rates and asking prices, and that’s assuming they’ve been able to raise a large enough deposit. A new record first-time buyer asking price of £224,943 means that a 10% deposit for a first-time buyer type home is now 57% higher than it was ten years ago, while average salaries have only increased by 31%.’

While soon-to-be homeowners will likely feel the sting of the rate increase, homeowners on a fixed rate will not be impacted yet. Mortgage rates for a two-year fix are still historically low at 3 per cent compared to 6 per cent ten years ago.

white house exterior with blue front door, wall lights and plants

(Image credit: Future PLC / Phil Dunk)

‘However, as rates creep upwards and with the wider economy uncertain, people may look for some financial certainty by locking in longer mortgage terms before they rise again,’ advises Tim.

Nick Leeming, Chairman of Jackson-Stops echos Tim’s advice saying those remortgaing will be the hardest hit: ‘Coming from period of historic low rates to a much less competitive market; an increase to this extent could mean a monthly increase of hundreds of pounds in real terms.’

‘The reality is that no part of people’s finances will escape the impact of soaring inflation. From the weekly shop to mortgage rates, cutting back where possible and locking in competitive deals while they’re still available should not be underestimated,’ he says.

Why has the Bank of England raised interest rates?

The Bank of England Monetary Policy Committee voted to increase the bank rate to help keep inflation in the UK stable. The Bank of England has a 2 per inflation target, which it has to meet while sustaining growth and employment. 

In a summary of the August monetary policy the committee said that its decision came following the increasing intensity of inflationary pressures currently on the UK, due to factors such as the increase in gas prices and rising costs. 

It said: ‘GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.’