Bank Rate Hits 4%: How Lenders Work Out What You Can Borrow

Yesterday the Bank of England raised Bank Rate from 3.75% to 4%, the first increase since August 2023. The vote was 8–1, with one member pushing for a bigger half-point rise. Many of you have rung or emailed since with the same question: "Does this change how much I can borrow?" It's a fair one, so let's go through it properly.

Where the market stands this week

Lenders had largely priced in this rise, so fixed rates haven't lurched overnight. Moneyfacts figures reported this week put the average two-year fix at roughly 5.97% and the average five-year fix at around 5.99%, so both are close to 6%. Tracker customers feel the change straight away, because their rate follows Bank Rate. The next Monetary Policy Committee decision is on 17 December, and markets are not currently expecting another move then, though that can change quickly.

How lenders actually decide what you can borrow

There's a common belief that a lender simply multiplies your salary. In practice, most lenders look at two things together:

1. Income multiples. Typically somewhere around 4 to 4.5 times your annual income, with some lenders stretching higher for certain professions or larger deposits.
2. Affordability. Your income against your essential spending and credit commitments, tested at a rate higher than the one you'll actually pay, so there's a buffer if rates rise later.

Since the Financial Conduct Authority removed its prescribed stress test in 2022, each lender sets its own affordability rate and rules. That's why two lenders can give very different answers on the same application, and why the right lender matters as much as the right rate.

Will a higher Bank Rate shrink my borrowing?

Possibly a little, but probably less than you fear. Lenders' affordability rates already sit well above the headline rate, so a quarter-point move doesn't always change the maximum. Where it does bite is on the monthly payment. As a rough guide, on a £300,000 repayment mortgage over 25 years, a rate of 6% costs about £1,933 a month, while 6.25% costs about £1,979. That's around £46 more, which sounds small, yet it can tip a borderline affordability calculation the wrong way.

Five ways to strengthen your affordability

1. Clear or reduce credit cards and loans. Lenders often count a percentage of your card balances as a monthly cost, even if you pay them off each month. Clearing a car loan can lift your borrowing more than a pay rise.
2. Cancel what you don't use. Unused subscriptions and spare cards all show up on statements and in credit files.
3. Increase your deposit if you can. A lower loan-to-value often unlocks better rates and more flexible affordability.
4. Consider a longer term, carefully. It lowers the monthly payment lenders assess, though it costs more in total interest, as I covered last week.
5. Get your paperwork ready. Self-employed borrowers should have two to three years of SA302s and tax year overviews to hand, and anyone with bonuses or overtime should have payslips ready.

If you're already on a deal

If you're on a fixed rate, nothing changes until it ends. If it ends within the next six months, now is the time to review your options, because most lenders let you secure a new rate well ahead of time, and you can usually switch to a better one if rates fall before you complete. If you're on a tracker, your payment will rise at your lender's next adjustment, so check your budget now rather than waiting for the letter.

My advice for this week

Don't panic, and don't assume the headlines apply to you. Your borrowing power depends on your income, your commitments and, importantly, which lender you approach. If you're buying, moving or remortgaging in the next few months, a conversation now costs nothing and could save you from an unwelcome surprise later. Get in touch and we'll run the numbers together.

Kindest regards

Ian

Ian A Moore CeMAP — Director, IM Mortgage Consultancy Limited

Your home may be repossessed if you do not keep up repayments on your mortgage. IM Mortgage Consultancy Limited is authorised and regulated by the Financial Conduct Authority. This article is for general information only and does not constitute mortgage advice; rates and figures quoted were accurate at the time of writing and are subject to change.