Bank of England holds interest rates at 3.75%: what it means for your mortgage, savings and household bills

The Bank of England has kept interest rates at 3.75% as inflation rises to 3.1%, but a financial expert has warned that the decision does not necessarily mean mortgage rates will stay where they are.

Millions of homeowners, buyers and savers have been given some certainty after the Bank of England announced it was holding its Bank Rate at 3.75%.

The Bank’s Monetary Policy Committee announced its latest decision on Thursday, September 17, against a backdrop of renewed concerns about the cost of living, after UK inflation climbed to 3.1%.

The Consumer Prices Index (CPI) rose by 3.1% in the 12 months to August, up from 2.9% in July, according to the Office for National Statistics. Transport costs, particularly motor fuels, made the largest contribution to the increase.

The latest figure puts inflation further above the Bank of England’s 2% target and means prices are, on average, continuing to rise faster than policymakers would like.

The Bank has now maintained Bank Rate at 3.75%, with volatile energy prices and the risk of inflation remaining higher for longer among the concerns facing policymakers.

But what does today's decision actually mean for your mortgage, savings and household finances?

What does the 3.75% interest rate mean for mortgages?

Tim Grimsditch, Managing Director of Unbiased, the UK financial advice platform, says households should not assume that a Bank Rate freeze means all borrowing costs will now remain unchanged.

He said: “Today’s interest rate decision comes at a difficult time for households, with inflation rising again and consumers facing renewed pressure from higher fuel, energy and everyday living costs.

“The Bank of England has held the Bank Rate at 3.75%, but consumers need to look beyond the headline number because the impact will be very different depending on whether you are borrowing, buying a home, remortgaging or saving.”

For the millions of homeowners currently on fixed-rate mortgages, today's announcement will not change their monthly mortgage repayments.

Their interest rate is fixed until their current deal comes to an end, meaning the rate available when they eventually remortgage will be more important to their household finances.

Tracker mortgages are more directly linked to Bank Rate, but because the Bank has opted to hold rates, customers should not see an immediate change to their payments as a direct result of today's announcement.

Tim explained: “With the Bank Rate held at 3.75%, nothing changes overnight for most households, but it doesn't necessarily mean borrowing costs or household finances are standing still.

“For mortgage holders on fixed-rate deals, monthly repayments will remain the same until their deal expires. Tracker mortgage customers should also see no immediate change as a direct result of today’s decision.”

Could mortgage rates still change?

The Bank of England's decision to leave rates unchanged does not mean the mortgage deals being advertised by lenders will necessarily remain at their current levels.

Banks and building societies consider a range of factors when pricing mortgages, rather than simply following Bank Rate. The Bank of England itself notes that the interest rates offered by high street banks depend on factors beyond Bank Rate.

That means mortgage rates could move even without a change from the Bank of England.

Tim said: “For homebuyers, a hold provides a degree of stability, but mortgage rates can still move.

“Fixed mortgage pricing isn't determined by Bank Rate alone. Lenders also look at financial markets, inflation and expectations about where interest rates are heading next.”

For anyone approaching the end of a fixed mortgage deal, that means it can be worth looking at the options available before their existing rate expires rather than assuming today's announcement will keep mortgage deals unchanged.

Why is inflation back up to 3.1%?

Inflation is once again becoming a headache for both households and the Bank of England.

CPI inflation increased from 2.9% in July to 3.1% in August, reaching its highest level for five months. The ONS said transport, particularly motor fuels, was the biggest contributor to the increase.

The Bank's inflation target is 2%, meaning the latest figure is more than one percentage point above target.

And while inflation falling does not generally mean prices return to where they were previously, a rising inflation rate means the overall pace at which prices are increasing has accelerated.

Tim said: “The bigger issue for consumers is inflation. CPI has risen to 3.1%, meaning prices are increasing at a faster rate again.

“Higher fuel and energy costs can feed through into everything from household bills and transport to the cost of producing and delivering food and other goods.

“That creates a difficult balancing act for the Bank. Keeping rates higher can help contain inflation, but it also means borrowing remains relatively expensive for households and businesses.”

The Bank has also warned that energy prices remain volatile because of conflict in the Middle East and that inflation is expected to rise further from its current 3.1% level.

What should households do now?

For consumers, the impact of today's announcement will depend heavily on their individual circumstances.

Someone with several years remaining on a fixed mortgage could notice very little immediate difference, while a homeowner approaching a remortgage, a first-time buyer looking for a deal or someone carrying other borrowing may be much more exposed to changing rates.

Savers also need to pay attention to the rates being offered on their accounts, particularly while inflation is running at 3.1%.

Tim said: “Ultimately, today’s Bank of England decision is only one part of the financial picture.

“For households, what matters most is how comfortably they can afford their mortgage and other borrowing, whether their savings are working hard enough and how rising prices are affecting their overall budget.

“Consumers shouldn’t make major financial decisions based on a single interest rate announcement. Looking at your finances, planning for different scenarios and speaking with a qualified financial adviser can be much more valuable than trying to predict exactly what the Bank of England will do next.”