RBS hits mortgage customers as Bank announces first UK interest rate rise in a decade

The Bank of England has today reversed the last cut in interest rates taken in the immediate aftermath of last year’s vote to leave the EU and lifted the historically low base rate from 0.25 per cent back to 0.5 per cent, marking the first increase since July 2007.

Bank governor Mark Carney said he expects banks to pass on the rate rise to savers, but added many mortgages, loans and credit cards would not see an immediate impact.

Following the announcement, Edinburgh-based Royal Bank of Scotland Group confirmed that it had indeed correspondingly increased its base rate across its NatWest, Ulster Bank and RBS brands from 0.25 per cent to 0.50 per cent.

The 73 per cent state-owned lender said that while those customers on Base Rate Linked products will see the increase their rate to 0.50 per cent, existing customers with Fixed Rate products will not see a change in their rate during their fixed rate period.

It added that it is currently reviewing whether to make any changes to Variable Rate products and will provide an update in the near future.

Almost four million households in the UK now face higher mortgage interest payments.

Young and middle income mortgage owners face the biggest cost increases, the Resolution Foundation said in response to today’s decision.

The Foundation’s analysis found that the combination of falling homeownership, a falling share of homeowners with mortgages, and a falling share of mortgagors on variable rates mean that barely one in ten families (11 per cent) are likely to be affected in the short term by today’s rate rise in terms of higher mortgage costs – down from 19 per cent a decade ago.

Families aged 45-54 (19 per cent), and those living in the East and West Midlands (14 per cent and 13 per cent respectively) are most likely to be on a variable rate mortgages and face overnight cost increases.

Looking at the scale of potential increases in mortgage costs, the Foundation finds that the average increase for variable rate mortgage holders of a 0.25ppt rate rise is £6.40 a month (or 1.3 per cent).

Although there are less of them, young variable rate mortgage owners (aged 18-24) will face the biggest cost increases (2.6 per cent), along with those on middle incomes (2 per cent) and those living in the South West (2.5 per cent).

Looking ahead to a future scenario in which mortgage rates rise by 1ppt, the Foundation’s analysis finds that young households with mortgages (aged 18-24) would face the biggest cost increases (8 per cent or £31.40 a month), along with middle income mortgage owners (7.9 per cent).

Matt Whittaker, Chief Economist at the Resolution Foundation, said: “The big changes that have taken place in our housing market over the last decade mean that barely one in ten families are at risk of seeing the overnight effect of today’s interest rate decision through higher mortgage costs.

“For most homeowners the effect of today’s rise will be modest or negligible, though younger home-owners and those on middle incomes will face the biggest effects.

“Should interest rates continue to rise over the coming years, the effect on mortgage holders will be far more significant. But prospects for future rises remain highly uncertain, particularly given the lack of firm evidence that wages are rising sustainably.”

The Bank of England said that it estimates that almost two million mortgage holders have not experienced an interest rate rise since taking out a mortgage.

Mr Carney said “Brexit-related constraints” on investment and workers appeared to be holding back the potential growth of the economy.

The Bank of England is tasked with keeping consumer price inflation at around 2 per cent.

However, inflation has been running higher than that since February, and in September it hit 3 per cent - the highest rate since April 2012.

Mr Carney said inflation was unlikely to return to 2 per cent without raising rates, because the economy was growing at levels “above its speed limit”.

Those welcoming today’s announcement, however, will be many of the country’s 45 million savers, and anyone considering buying an annuity for their pension will also see better deals.

Vince Smith-Hughes, retirement expert at Prudential, said: “Rising interest rates will be welcomed by retired people who often have a large proportion of their savings in deposit accounts. Rising inflation has eroded their retirement income as deposit accounts fail to keep pace with inflation. The rise in interest rates will hopefully see better returns from savings accounts. Using the right wrappers to minimise tax is also important.”