Today’s news heaped further economic pressure on households (Picture: Shutterstock / TimeShops)

The Bank of England has hiked interest rates by 0.75 percentage points, taking the base rate from 2.25 per cent to 3 per cent – the steepest one-day rise in 33 years.

It means interest rates are now at their highest in 14 years, pushing up mortgage costs, rents and rates charged on almost all forms of borrowing.

The Bank of England’s governor Andrew Bailey said households face a “tough road ahead” as central bankers battle to bring inflation down from a 40-year high.

It may help curb the rapidly rising cost of living eventually, but it will pile even more pressure on our finances over the coming months.

Here’s what higher interest rates mean for you according to Sarah Davidson, Metro consumer champion.

Will my mortgage go up?

How will your mortgage be affected? (Picture: Dinendra Haria/Anadolu Agency via Getty Images)

If you’re on a tracker rate or your lender’s standard variable rate (SVR), your monthly payments are going to go up by quite a whack.

A £200,000 mortgage with a 25-year term sitting on an average SVR of 5.86 per cent means mortgage repayments of £1,272 a month.

If the lender hikes its SVR by the full 0.75 percentage points, the mortgage rate becomes 6.61 per cent and monthly payments rise by £92 a month to £1,364.

If you’re on a fixed rate deal, your payments won’t change until you need to remortgage. At that point, expect your monthly payments to jump significantly.

Moneyfacts data shows the average 2-year fixed rate mortgage in November 2020 was 2.29 per cent, making monthly repayments on the mortgage above £876.

The average two-year fixed rate today is 6.47 per cent, taking repayments up by £470 a month to £1,346 per cent.

If lenders pass on today’s hike, which they will, that would likely see the average two-year fix go up to 7.22 per cent and monthly payments jumping to £1,442.

Anyone remortgaging that same loan now, will have to find another £566 every single month to keep up with repayments.

Will my overdraft charges go up?

Overdraft rates won’t be hit by inflation or interest rates (Picture: Getty Images)

The watchdog brought in rules a few years ago, effectively capping overdraft charges.

It led to most current account providers imposing a flat interest rate charge of 40 per cent on overdrawn accounts.

That’s extremely expensive so pay it off if you can.

The only upside of overdrafts is that rate won’t go up with either inflation or interest rates.

Will I have to pay more for my personal loan?

The Bank of England has 0.75 percentage points (Picture: Matthew Horwood/Getty Images)

Probably, yes. Think mortgages but a lot more expensive. Personal loan rates for a £5,000 loan taken out two years ago would have carried an average rate of 7.6 per cent. The same loan today carries a rate of 8.5 per cent.

If you’re on a fixed rate deal, your payments won’t change, but do check your terms and conditions for any small print that could let your provider pass on higher charges.

Some personal loans are on variable rates, in which case your payments are going to rise.

A £5,000 loan with a rate of 8.5 per cent fixed for five years will mean monthly repayments of £103. If that rate goes up in line with the base rate, to 9.25 per cent, monthly payments will be £104.

Will interest rate rises affect my credit card?

People have been urged to pay off outstanding debt (Picture: Getty Images)

If you can pay off any outstanding debt sitting on a credit card, do it.

Credit card interest charges are almost always variable and providers have been passing on higher charges all year.

Moneyfacts figures show the average credit card APR was 25.2 per cent in October 2020; today it’s 29.8 per cent.

If you have a 0 per cent deal you should be safe until that fixed period ends. But try to pay the balance off before that happens.

Are savings rates going to go up?

Banks and building societies have been raising savings rates for a while now, though not quite as fast as they have been on mortgages. That said, there are some pretty good deals available.

Al Rayan Bank’s Everyday Saver pays 2.81 per cent with a minimum balance of £5,000. Yorkshire Building Society’s online rainy day account lets you open with just £1 and pays 2.5 per cent up to £5,000 and 2 per cent above that. You can only withdraw money twice a year.

Fixed rates are significantly higher with Oxbury Bank paying 4.65 per cent on its one-year fixed rate bond. A spate of providers pay 4.6 per cent and 4.5 per cent on their one-year fixed rates.

Savings rates change daily and given today’s base rate hike, watch out for another jump. Holding off before locking into a fixed rate account could mean a much better rate of interest.

Are interest rates good for me if I’m retiring?

‘Anyone wanting inflation protection or to leave money behind to loved ones when they die will need to accept a significantly lower starting income’ (Picture: Getty Images)

After retirement, annuities allow you to use all or part of your pension savings to buy a guaranteed fixed monthly income until you die.

For more than a decade they’ve been almost worthless because interest rates have been so low. Now, they’re beginning to look more attractive.

Tom Selby, head of retirement policy at investment platform AJ Bell, said: ‘Annuity rates have increased by 40 to 50 per cent this year.

‘To give you an idea of what you can get for your money, a £100,000 fund might buy a healthy 65-year-old a single-life, level annuity paying around £7,684 a year.

‘However, anyone wanting inflation protection or to leave money behind to loved ones when they die will need to accept a significantly lower starting income.’

One caveat with this option – the Bank of England has indicated this isn’t the last interest rate hike we’ll see so waiting for a bit longer before locking in could get you more for your money.

Another thing to bear in mind is that the best annuity rates are not inflation-linked, meaning your fixed income payment will buy less each year as the cost of living rises.

Will my pension be protected from interest rate rises?

Inflation and interest rates affect all aspects of our lives (Picture: PA)

Interest rates don’t affect all things financial. Sometimes regulation prevents companies passing on higher costs to customers and if you’re in a guaranteed arrangement your contract terms will protect you from higher interest rates.

Final salary pension payments – also known as defined benefit pensions – won’t change based on interest rates, although most will move in line with inflation.

Currently that’s running at 10.1 per cent.

Bear in mind that the Bank of England is hiking interest rates to try to bring inflation down to 2 per cent, so there is an effect – it’s just less immediate.

If you’re drawing down your pension, the value of your pot will be affected by movements in the stock market and whether dividend payments continue or have to pause.

The Bank of England’s base rate does affect this, but in a whole host of different ways.

A good rule of thumb is to draw down only as much as you need and keep the maximum you can afford invested for as long as possible. This will protect you from the worst of stock market volatility and give your savings more time to grow.

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