Base Rate Rises To 5.75%

Good news for savers and bad news for borrowers as the Bank of England increases its base rate by yet another 0.25%.

For the second time in three months, the Monetary Policy Committee (MPC) of the Bank of England has voted to increase the Bank's base rate by another quarter-point (0.25%). Thus, the base rate rises today from 5.5% a year to 5.75%, which is a six-year high.This latest rise comes on top of four identical rate hikes (on 3 August and 9 November 2006, and 11 January and 10 May 2007), which together have taken the Bank's base rate from 4.5% to 5.75% a year. In other words, since last August, the base rate has risen by 1.25%, or two-sevenths (28%), piling more pressure on overstretched borrowers.Of course, this is bad news for millions of mortgage borrowers, especially those whose loans track the base rate, as they will see an instant rise in their monthly repayments. Furthermore, most mortgage lenders react very quickly to hikes in the base rate. Therefore, borrowers whose home loans are linked to a mortgage lender's standard variable rate (SVR) -- such as those with variable- or capped-rate deals -- should await another rate-rise announcement later this month.For the record, the latest rate hike will add £192 a year to the cost of a £100,000 repayment mortgage over 25 years. You can check how much more expensive your home loan will be by using our mortgage calculator.Better off are those homeowners who enjoy the security of a fixed-rate deal, as their monthly repayments are unaffected by changes in the base rate. However, millions of borrowers with fixed-rate home loans taken out between 2003 and 2006 face 'rate shock'. When their attractive fixes end, they will find that today's fixed rates are considerably more expensive, thanks to higher interest rates and massively higher arrangement fees.The MPC has been raising the base rate in order to tackle inflation (the tendency of consumer prices to rise over time). However, its preferred measure of inflation, the Consumer Prices Index (CPI) doesn't include housing costs, so the MPC takes little notice of these when setting the base rate. Nevertheless, our decade-long housing boom has been fuelled by low interest rates, so turning the screw on borrowers should dampen demand and reduce house-price inflation -- although it hasn't happened yet!What's more, the worst may be yet to come, as economists and the money markets are pricing in at least one more quarter-point rise, which could take the base rate to 6% a year before the summer's out. This would mean that many mortgage lenders would charge SVRs in excess of 8% a year, putting more strain on household budgets.Although the base rate is much lower now than it has been in recent decades (for example, between July 1988 and September 1992, it ranged between 10% and 15% a year), we have several times more personal debt these days. Thus, small increases to the base rate have a far greater effect than they did in the past. Indeed, accountancy firm PricewaterhouseCoopers claims that we Brits now spend almost a fifth (19%) of our disposable income paying off debts, which is even higher than at the start of the last housing crash in 1990. Oops!Finally, some good news: British savers (especially the UK's twelve million pensioners) will welcome this move, as top savings providers will be quick to react by raising savings interest rates. If this keeps up, we'll soon have Best Buy savings accounts paying, say, 6.5% a year before tax, which is most welcome!More:Five Property Warning Signs To Watch | Big Holes In The Housing Safety-Net!