The Bank of England has increased interest rates for the second time in three months.
The Bank Rate – the official cost of borrowing – has gone up from 0.25% to 0.5%.
The move means around two million homeowners with variable rate mortgages will see their monthly repayments rise.
The change will add around £24 a month to repayments on a £200,000 mortgage.
The increase comes as consumers are already facing pressure on their budgets as a result of higher food prices and rising energy costs, while National Insurance contributions are due to be increased in April.
Energy bills are set to rise by 54% this year to an average of £1,971, after energy regulator Ofgem increased the cap on the prices that energy companies can charge.
The Bank of England warned that families faced the biggest fall in disposable income since records began three decades ago.
Why are interest rates going up?
Inflation hit a 30-year high in December of 5.4%.
The Bank’s Monetary Policy Committee (MPC) uses changes to interest rates as a way of controlling inflation.
It is supposed to keep inflation – which measures the rate at which things we buy get more expensive – at 2%, as measured by the Consumer Prices Index.
But inflation is currently more than double this level and it is expected to rise further to peak at more than 7% in April.
The MPC is made up of 12 members who all vote on whether or not interest rates should be changed.
At the latest meeting, four members voted to raise the Bank Rate to 0.75%, suggesting there are further interest rate hikes to come.
What does it mean for me?
You will only be impacted by the interest rate change if you are on a mortgage that moves up and down in line with changes to the Bank Rate.
These are mortgages such as tracker deals or standard variable rates, which you revert to when a fixed term deal comes to an end.
Around 850,000 homeowners are currently on tracker mortgages, while 1.1 million are on standard variable rate ones, according to mortgage trade body UK Finance.
People with a £200,000 mortgage will see their repayments increase by around £24 per month following the latest hike, increasing their monthly payments by just under £40 once the previous increase is factored in.
Around 74% of mortgage holders are on fixed rate deals, and they will not see any change to their monthly repayments.
This is because under fixed rate mortgages the interest rate you pay remains the same for the length of the deal, which is usually two to five years.
What should I do now?
If you are currently on a fixed rate mortgage, you don’t need to worry about higher interested rates until your deal ends.
If you are on a tracker mortgage and want to protect yourself from further interest rate rises, you may want to switch to a fixed rate deal.
But before you do this, check to make sure you will not incur any penalties for ending your deal early.
If you are on a standard variable rate you can switch to a new mortgage at any time.
The good news is that although mortgage rates have risen during the past month as lenders anticipated the latest rate hike, competitive deals are still available.
The average cost of a two-year fixed rate mortgage is now 2.44%, while a five-year fixed rate deal is 2.71%, and a 10-year fixed rate mortgage is only slightly more expensive at an average of 2.85%.
This compares with an average rate of 4.46% for people on standard variable rates.
If you think you may struggle to keep up with your mortgage repayments after the latest interest rate rise, it is important to contact your lender as soon as possible.
There are a number of steps lenders can take to help you, including granting you a temporary payment holiday or putting you on to an interest-only mortgage for a short time.
But options become much more limited if you have already missed a payment.