An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed.
Many homeowners face higher mortgage payments after the Bank of England said it could no longer tolerate the inflation level and announced the first increase in interest rates in more than 10 years.
Despite weak growth and mounting uncertainty over the terms of Britain’s exit from the European Union, Threadneedle Street increased interest rates to 0.5% from 0.25% on Thursday, reversing emergency action taken immediately after the Brexit vote.
The move will add £22 a month to the costs of servicing the average variable rate mortgage, although the recent popularity of fixed-rate home loans means it will initially affect only 43% of home buyers.
Mark Carney, the Bank’s governor, said it was time “to ease our foot off the accelerator” but sought to reassure consumers and businesses that the first increase in rates since July 2007 was not the start of a sustained upward trend.
As things stand, Threadneedle Street is expecting two further quarter-point increases in interest rates by the turn of the decade, which would leave them at 1%.
The Bank said that the financial crisis and deep recession of a decade ago had permanently damaged the economy’s growth potential. Brexit had further reduced the “speed limit” at which the United Kingdom could operate without generating higher inflation, Carney said.
Still, the rate decision sparked sharp questions over the ability of consumers to repay loans amid rising use of personal borrowing and credit cards to offset higher prices.
Households are, in total, expected to face about £1.8bn in additional interest payments on variable rate mortgages in the first year alone, according to analysis by the accountancy firm Moore Stephens. The firm also estimates that households will pay as much as £465m in additional costs on credit cards, overdrafts, personal loans and car finance.
The Bank faced criticism for the timing of its decision due to weak readings on the economy and a lack of clarity from the Brexit talks.