The Bank of England’s Monetary Policy Committee will meet next week to decide whether to increase interest rates again, providing more cheer for savers but bad news for borrowers.
The Bank has already raised the base rate three times since December, and with inflation showing no sign of slowing, another increase is widely expected. If it votes to raise the base rate to 1% next week, this will mean it is at its highest level since February 2009.
Here, we explain what higher interest rates mean for your finances, and how you minimise any negative impact.
If you’re currently locked into a fixed rate mortgage, you’ll have peace of mind that your mortgage payments won’t change even if rates go up again. However, you’ll need to consider how you’ll afford higher monthly costs when your deal finishes, as you may find the fixed rates mortgages on offer at that point are much steeper than the rate you’re currently on.
Samantha Bickford, mortgage specialist at Plymouth-based Clarity Wealth Management said: "I believe we are heading for a recession that will knock the socks off the last one. Another interest rate rise, and soon, is inevitable and will leave the poor people of Britain struggling even more. And the worst is yet to come.
“For those due to remortgage soon, don’t delay. My advice is to speak to your broker as soon as possible and secure a longer term fixed rate now while you can to ride out the mortgage market storm that is brewing."
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If you can afford to, it might be worth trying to overpay your mortgage now, so that when you do come to remortgage, you’ll be borrowing less. Most lenders allow you to overpay up to 10% of your mortgage balance each year without penalty, but always check the terms of your particular deal first.
Higher interest rates are good news for savers, who’ve had to put up with rock-bottom returns for several years. However, although savings rates are gradually starting to tick up, unfortunately there still isn’t a single savings account offering returns which match or beat inflation.
That said, it is still worth making sure you’re earning as much interest as you possibly can, so if your savings are currently languishing in a low interest-paying account, you should move them elsewhere.
Anna Bowes, of savings website Savingschampion.co.uk said: “Competition among the best buy tables has been simmering away over the last few weeks and another base rate rise should mean that there's more to come - but don't wait for too long as all the time you are waiting for better rates that might be round the corner, you 're missing out on more interest in the meantime.”
Chase Bank is paying a market-leading 1.50% annual interest before tax on its Easy Access Saver account, whilst Zopa and Cynergy Bank are both paying 1.20% on their easy access accounts. If you’re happy to tie up your money for a while, Flagstone is paying 2.10% on its one-year fixed rate bond, although this account can only be opened with a hefty £10,000 deposit. Alternatively, Raisin and Kent Reliance both offer 2.05% on their one-year fixed rate bonds which can be opened with a minimum balance of £1,000 and £1 respectively.
If you are planning on choosing a fixed rate savings account, it may be worth holding fire until next week’s base rate decision, as if the base rate does go up, higher rates may become available.